What is DeFi Lending? Best DeFi Lending Platforms

Decentralized Finance is seen by many as having numerous advantages over the traditional financial system, partly due to DeFi’s unique lending system. In this guide, we will tell you all about DeFi Lending.

Imagine a financial system where you don’t need third parties and you can transact with anyone anytime anywhere without any restrictions, yes! this is DeFi. Decentralized Finance is a type of financial system built on blockchain technology.

Technology aims to create an open source, permissionless and transparent financial services ecosystem that is open to everyone and fully decentralized (decentralized). Users will have full control over their assets and will be able to interact with this ecosystem through decentralized applications (DApps) or P2P interface.

Smart contracts are the building blocks of Decentralized Finance. Computer programs or transaction protocols automatically execute, control and enforce the transaction agreement between the parties in DeFi transactions. Ethereum launched DeFi applications and most DeFi applications are based on Ethereum making most tokens in the ecosystem ERC-20 tokens.

DeFi has many advantages over the traditional financial system. It provides easy access to financial services without restrictions. It is decentralized (no central authority). It has eliminated the existence of intermediaries or arbitrators, which would reduce the cost of transaction fees. Also, the lending option in DeFi is advantageous as it is easily accessible and profits can be made using Decentralized Finance loan.

What is DeFi Lending?

DeFi loan provides a platform where the borrower meets the lender on the platform in a trustless manner. That is, it opens the possibility for crypto holders on the platform to put their tokens into lending pools without intermediaries and arbitrators. A borrower will then be matched directly with the lender in a P2P interface.

When a user wants to lend their crypto on the DeFi lending platform, these tokens go to a lending pool where the borrower can access it. Smart contracts connect both the lender and the borrower.

However, both parties are extremely anonymous because in this case there is no physical property to use as collateral as traditional financial systems usually do. The borrower must deposit at least the same value of the token he wishes to borrow. For example, if you want to borrow 10 Bitcoins from lending pools, then you will need to deposit the equivalent of 10 Bitcoins in DAI, which is 84,263.75 DAI.

After some time and you want to repay the loan + 10%, you have to pay in the loan pool and then the DAI you originally deposited will be returned to you and 10% goes to the Bitcoin investor pool.

Decentralized Finance are arguably the most valuable DApps in terms of locked crypto assets on the Ethereum-based network.

Comparison of DeFi Lending vs. Traditional Lending

DeFi has so far focused on centralization, security, etc. He proposed solutions to old problems faced by traditional financial systems such as Still, it has led to new complexities such as lack of liquidity. We’ll look at some of the areas where DeFi does and does not have an advantage over traditional loans.

Decentralized Finance loan uses a blockchain-based network for its transactions, making the entire process devoid of any central authority, third parties or arbitrators. This makes DeFi loan seamless and private between borrower and lender, rather than traditional lending that has to be mediated by an intermediary (in most cases, banks) and backed by arbitration.

The decentralized nature of DeFi loans is a big plus, but it also has disadvantages. The entire process is decentralized and no paperwork, ID or KYC is required, making DeFi susceptible to money laundering practices.

One aspect where DeFi loan outperforms traditional loan is in the area of ​​collateral representation. The traditional finance loan system requires collateral in the form of physical properties. However, DeFi loans do not require physical features as collateral; instead, tokens deposited in DeFi protocols are used as collateral.

A downside to this is that sometimes the collateral needed by DeFi loan platforms is always advantageous. For example, DeFi lending platform MakerDAO requires borrowers to guarantee their loans at least 150% of the value of the loan requested.

However, the fact that the value of collateral can rise is a draw for investors.

To get DeFi credit, all you need is an internet connection, a DeFi wallet and opening a smart contract.

Best DeFi Lending Platforms

There are several DeFi lending platforms available; we will look at some of the popular Decentralized Finance loan platforms.

Aave

Aave is a type of DeFi lending protocol that allows users to lend and borrow various cryptocurrencies using stable and floating interest rates. Originally launched as ETHLend, it was founded in 2017 by Stani Kulechov. Held in November 2017, the ETHLend ICO raised $600,000 worth of donations. ETHLend was later renamed Aave in September 2018.

A distinctive feature of Aave is that it uses a Flash Loan system. This means you don’t need to have collateral to claim a loan on the platform. Flash Loan relies on the loan repayment timing rather than guaranteeing repayment with collateral. As long as the loan is used and fully repaid within the block in which it was issued, it is approved. On the other hand, if the loan is not repaid within the same block, the entire transaction will fail. Aave also offers flexible rates on lending interest.

Compound.Finance

Compound.finance, like most DeFi lending platforms, is a system of openly accessible smart contracts built on Ethereum. Robert Leshner founded it in 2018. It uses the native token cToken to allow users to monetize their coins and also use it for transactions in the app; this makes Compound.Finance different from other DeFi lending platforms.

Another distinctive feature of Compound is that once the user’s funds are converted to ERC-20 tokens, it can be easily moved through other DApps. The ability to combine different protocols as building blocks represents a key feature of the DeFi movement.

Compound is not decentralized as the Compound team currently manages the protocol. Still, the company plans to achieve 100% decentralization by delegating full authority to a Decentralized Autonomous Organization (DAO) managed by the Compound community.

Maker

Maker is a DeFi lending platform that allows users to borrow DAI tokens only. It currently only allows ETH and BAT token trading. MKR engages users in their operational earnings by introducing “management fees” that act as interest rates for the network. Users can hold their collateral in a core Maker smart contract called a Collateralized Debt Position (CDP) to generate DAI.

Maker welcomes users every Thursday at 12:00 EST for up-to-date information on weekly governance and risk calls. Summaries of these searches are published in Maker.