DeFi Lending/Borrowing Development
In the space of decentralized finance (DeFi), one of the most eagerly sought-after development protocols is lending/borrowing. This is because of its unique approach in the field of the banking industry that gets rid of all the existing shortcomings. The profit reaped in DeFi lending (or) borrowing protocols is also huge.
"For the foreseeable future, I'm all about building blockchain-based decentralized services," said Fred Ehrsam, the co-founder of world-famous crypto exchange Coinbase.
With so many affirming statements about DeFi's success and it's potential future, let's quickly witness it for ourselves by exploring the mechanism employed in DeFi protocols and its business prospects.
Challenges in Conventional Lending/Borrowing
Consider you wish to borrow a sum of amount from a nearby bank. Can you imagine the complications involved in the process?
From manual filling out of forms to credit score check, the time it consumes, and the difficulties faced are massive. In some cases, certain banks even misconduct with their customers with a discriminational approach.
The alternate option to banking organizations is private lending and borrowing. Since that cannot be regulated and the parties are mostly untrustable, loanees often encounter conflicts.
Lending and borrowing practices are essential to either maximize our income or meet our urgent demands instantly. But since the existing system is rigged with flaws, is there a way out to borrow and lend funds fast with proper security?
Well, we've got a way out. And that's decentralized finance (DeFi).
Role of DeFi in Lending/Borrowing
DeFi's immediate success is credited to its architecture and system of work. The decentralized nature of DeFi protocols offers transparency in every process involved and helps us gain ownership over our funds. In simple words, unlike the banking sector, there's no third-party involved.
DeFi plays a phenomenal role in lending and borrowing protocols. Here's how it works for lenders and borrowers.
Users can lend their crypto-assets to any borrower irrespective of their race, nationality, or status. Based on the amount lent, lenders earn respective interest from the borrower. Also, in some lending/borrowing protocols, they also earn additional DeFi tokens for lending the same.
Borrowers who wish to borrow digital funds are required to deposit their crypto-assets as collateral. This collateral is usually higher than the sum borrowed due to the volatile nature of the crypto market. However, this is solved by stable coins that are pegged to a constant value. Thus borrowers can borrow crypto funds. Their collateral is subjected to liquidation if they fail to repay the borrow the amount.
If the system is decentralized, without any middle-men, how exactly are these activities executed?
Yes, smart contracts are pre-coded conditions that execute functions based on the conditions. They collect, deposit, transact and liquidate funds based on the pre-set criteria. Smart contracts cannot be altered once set. Thus, the entire system is automated and made secure.
Examples of DeFi Lending/Borrowing protocols
The compound is a decentralized protocol that helps users earn interest by lending their Ethereum digital assets for acquiring real-world assets like real estate and other commodities.
Compound - Working Mechanism
- Investors lock crypto assets in the protocol.
- Locked assets are moved to the global supply market.
- From the global supply market, borrowers can borrow their desired asset.
- Profit generated from the lent amount is distributed among the investors.
- Assets are tokenized through their cTokens.
- cTokens let the user move and trade the assets in various protocols.
- Major perk - cTokens can be converted to original assets and withdrawn anytime.
Aave is another decentralized protocol where the interest rates in pools are algorithmically adjusted. Users can lend/borrow cryptocurrencies on both stable and variable interest rates.
- It monitors the liquidity reserve and collateral price fluctuations.
- If the collateral value drops below the limit, it leads to liquidation.
- Aave maintains the consistency of every pool's market value.
- Its aTokens are used for paying interest.
- Its LEND tokens act as governance tokens, granting voting rights to its hodlers.
Aave flash loans
In flash loans, users can avail of loans, earn a profit using the loaned amount, and repay the borrowed amount in less than 15 seconds. If the user is found in a situation where he can’t repay the full amount, the entire process is blocked from happening. So, the lender gets to retain his amount.
Benefits of DeFi Lending/Borrowing
- Users can avail of loans without any hassle like credit check, racial discrimination, or time-consuming process.
- Equitable financial opportunities to everyone across the world.
- No middle-men. Hence, no disputes.
- The lowest transaction fee as the system is decentralized.
- Loans can be availed and repaid with profit in less than 15 seconds.
- All you need is a smartphone with internet connectivity.
- Completely automated system.
- Smart contracts make the protocol trustworthy.
Business opportunities in DeFi Lending / Borrowing
- Total value locked in Compound
- October 2018: $2.7 million (USD)
- October 2019: $114.9 million (USD)
- October 2020: $857.2 million (USD)
Evidently, the figures are scaling exponentially. It confirms DeFi’s growth is set to be massive in the upcoming years.
Launch your DeFi Lending/Borrowing protocol with Osiz Technologies
Osiz Technologies, a leading DeFi Development Company, has 10+ years of experience in blockchain technology. Our pool of blockchain architects and DeFi developers are guaranteed to deliver quality DeFi development services to launch your DeFi lending/borrowing platform.
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