DeFi Loan – Everything You Need To Know

March 11, 2022


The growing potential of the Blockchain industry has naturally allowed several digital and technological invasions to take a front seat. Besides tapping its power in Cryptocurrencies, Blockchain has acted phenomenally in facilitating financial services under the umbrella term “Decentralized Financing” (DeFi). The DeFi concept is prominently backed by Smart Contracts which are considered the backbone of the digital ecosystem.

As a result, DeFi has strengthened the development of fintech with its widely known application or a product called DeFi Loans which have garnished the massive capital infrastructure globally.

What is DeFi Loan?

DeFi Loan is the fastest–growing element of the crypto ecosystem where crypto holders get the opportunity to lend their assets and earn interest. On contrary, the borrowers have to put the collateral in exchange for the DeFi loan value to combat the price fluctuations. The basic idea of the DeFi loan is to make financing available to all by revolutionizing the entire financing industry.

The DeFi lending process comprises borrowing, lending, margin trading, and spot trading. As a result, individuals can easily access loans without the need to disclose their identity to a third party and emerge as a profound piece of technology.

Features of DeFi loan

The DeFi ecosystem is known to mortar financial institutions by focusing on lending, borrowing, investing, and trading aspects. However, that is not merely the job DeFi does, instead, its blockchain functioning allows it to offer additional benefits to the crypto holder.
● It is a decentralized and anonymous platform.
● Here, interest is generated by lending crypto assets to the other party largely through lending pools.
● Borrowers are meant to –collateralize the loan to ensure safer financing.

How do DeFi loans work?

Here, the powerful Smart Contract technology allows users to pool their assets and distribute them to the interested borrowers keeping into consideration the rule of the loan which are usually written in the contract. However, such loan pools have a distinct way of distributing interest making it important to research the type of pool required for the investors.

Isn’t it true that No Asset can accrue interest while sitting idle? Moreover, the fluctuations in the value of the underlying assets do not lead to any earnings too. Hence, DeFi loans come into existence here and address the prevailing issue. As this allows holders to lend their crypto assets and earn interest in return.

Advantages of DeFi Loans

There are several advantages that users experience while dealing with DeFi loans. Hence, some of the notable and beneficial aspects of DeFi lending are as follows.
● The DeFi ecosystem allows better opportunities for processing loans at a faster speed due to its machine learning algorithms, data analytics, and cloud infrastructure.
● The consistency can be achieved by clearly outlining the credit rules and policies in the smart contract.
● Such loaning protocols are easily accessible due to their Permissionless nature. As a result, there exists no geographical and funding barrier.
● The automated loan execution is a result of high programmability which has contributed significantly to developing modern digital instruments.
● Alongside, the Web3 Wallets in the DeFi world such as Metamask help to maintain formidable custody and control over the assets.
● The decentralized nature of DeFi ensures effective data coordination and allows a highly secure and auditable financing system.
● Furthermore, DeFi lending products allow easy integration and support multiple functionalities. Hence, with DeFi it becomes easy to lock one type of crypto asset and obtain the loan in another.

Top DeFi Lending Platforms

In the short while, the DeFi lending marketplace has observed growth in several innovative platforms and has made the place quite competitive. Some of the most talked DeFi lending platforms that facilitate financial revolution is as follows.

  1. Compound – This DeFi platform is created on the money market approach and supports capital pooling from all the eligible cryptocurrencies. Moreover, the new governance system of Compound has introduced the principle of community governance was debated, implemented, suggesting, development financing environment has become completely seamless.
  2. Alchemix – These DeFi lending platforms provide loans with a little twist. Ever heard of a loan that gets repaid on its own? To the surprise, this happens on Alchemix where users are supposed to deposit DAI in the smart contracts with the aim to borrow DeFi loan on the platform. In exchange for such DAI, users receive tokens representing the future yield of the deposit. Moreover, it uses an aIUSD token which can be transmuted to DAI in Alchemix itself, and trading on DeFi Exchange becomes convenient.
  3. Aave – This DeFi loaning protocol is non–custodial and allows users to participate in the protocols and seek funds. Moreover, lenders start earning interest rates in the form of a passive income in the short while. The interest so earned can also be further used for offsetting the interest on the platform.
  4. Maker – This is not a new name any longer because of its growing popularity in the Decentralized Financing culture. The platform’s DeFi protocols allow the collection of Smart contracts to decrease the price volatility of the Dai Stablecoin. Hence, lending and borrowing are free from counterparty risk which further Maker the widely accepted dApps on Ethereum.

Future of DeFi Loans

As DeFi continues to keep its best foot forward with every innovation and technological advancement, the financing world seems to get an expanded boost. The promising growth and adoption of DeFi in the year 2020 have certainly led the road toward the creation of more refined DeFi lending protocols. Hence, the future of DeFi projects is certain to gain investors, enterprises, and startups’ attention in the upcoming years too.

The serious loophole in the traditional financing mechanism can be well – addressed using DeFi Protocols and the world is ready to give this technological movement a warm welcome.

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