Understanding: DeFi Loans

Understanding: DeFi Loans

There is a growing desire to decentralize everything that can be decentralized, and the finance and financial industry offers a suitable platform for decentralization. It’s not surprising, particularly with bitcoin being closely associated with blockchain technology. Even though many are beginning to embrace blockchain technology for fair use, decentralized finance (DeFi) presents real proof of crypto being a valuable utility.

Even though DeFi finds application in many finance areas such as remittances, derivatives, and investments, its most promising sector has to be credit and lending. Why is this so? This fact is because the openness, security, and transparency of blockchain make it possible to make loans and credits available to a larger pool of people. The interoperability of blockchains allows for the creation of an ecosystem for lending products and services.

This sector has seen significant growth in recent years, but more work needs to be done to make it highly competitive with established financial systems. Users need to be careful when using an early stage or untested DeFi platform and services because some are not truly decentralized.

Why are they essential to the big decentralized lenders?

DeFi refers to blockchains, cryptocurrencies, or smart contracts to provide financial services to clients. And when it comes to loans and credit, there are multiple platforms, services, and corporations that are leveraging on decentralized ledger technology for lending services. For example, MakerDao, lends stablecoin — DAI, to users. Users can get loans by depositing Ether (ETH) with the Maker system as collateral.

A survey by a DeFi.Review website shows that MakerDao is the biggest decentralized Finance platform by a significant margin with over $500 million in ether locked up in its platform. EOS REX follows closely with EOS deposits worth around $435 million, which lends to users who need extra EOS to stake the cryptocurrency for additional CPU/NET bandwidth on the EOS blockchain. Even though JIFU is developing its DeFi platform, where you can get loans using the JIFUcoin, we recommend MakerDao to our partners in the meantime.

Both of the platforms above are infrastructural. They serve primarily to support crypto economies and ecosystems as such; they arguably don’t satisfy the common sense or traditional definition of lending and credit, given that they aren’t awarding loans to the general public. Meanwhile, they both account for roughly 86% of the total amount of digital assets locked up by DeFi platforms (according to DeFi.Review) indicates how young the sector still is.

Why lending is better when it’s decentralized

Nonetheless, as young as DeFi lending may be, there are many other platforms besides MakerDAO and EOS REX that are offering credit via decentralized means. Many of the lending platforms let users borrow or lend a range of crypto assets on the Ethereum blockchain, from Wrapped Ethereum to BAT, ZRX, and DAI. They have a relatively simple dashboard, with visitors being able to choose to borrow or lend any supported crypto and with them being presented with the variable interest rate they’ll benefit from or have to pay. It also allows customers to use Ledger or MetaMask to monitor the Ethereum blockchain and track their transactions. This transparency is a big part of why decentralized lending and DeFi are more generally likely to succeed.

The main benefits of DeFi are the control, security, and permissionless nature offered for the end-users by DeFi products. Most blockchain-based credit platforms don’t require users to have a good credit score or even a credit history. They cover risk by taking collaterals in the form of crypto, as seen with the example of MakerDao. A good example is Nexo, which offers instant loans in over 45 fiat currencies. Also, the decentralized, blockchain-based nature of DeFi lending systems allows companies to provide credit at a lower cost, making loans cheaper for a broader range of people.

In conclusion, the future challenges and future promise of DeFi need to be appropriately addressed by all stakeholders. There’s little doubt that the blockchain-based lending world promises to be a tantalizingly great one. However, it’s still in its babyhood, hence, potential customers and the finance industry generally should have regular pauses for reflection. While it’s still very new, decentralized finance will ultimately be the norm if these solutions fulfill the promises of transparency, openness, and access.

AO/X Staff