The growth of decentralized finance and FinTech has led to a number of innovations. One such innovation is the ability for borrowers to access financing through non-traditional means, implemented by companies like Lendingblock which uses blockchain technology.
Because of its inherent trustlessness and simplicity of obtaining cash, the world of decentralized finance (DeFi) is progressively spreading to embrace a major portion of the worldwide financial lending market. New goods and services have developed as the crypto ecosystem has expanded to a $2 trillion market capitalization, due to blooming innovation in blockchain technology.
With the introduction of DeFi, lending and borrowing have become an important aspect of the crypto economy. Lending and borrowing are two of the old financial system’s main services, and most people are acquainted with phrases like mortgages and student loans.
In conventional borrowing and lending, a lender gives a borrower a loan and receives interest in return for taking the risk, while the borrower offers collateral in the form of real estate, jewels, and other valuables. In the conventional financial system, financial institutions such as banks support such transactions by completing background checks such as Know Your Customer and credit ratings before approving a loan.
Related: DeFi’s expansion has been fueled by liquidity, but what does the future hold?
Blockchain, borrowing, and lending
Lending and borrowing operations may be carried out in a decentralized way in the blockchain ecosystem, where the parties engaged in a transaction can deal directly with each other without the need of an intermediary or a financial institution using smart contracts. Smart contracts are self-executing computer programs with a specific logic in which the transaction rules are integrated (programmed). Fixed interest rates, loan amounts, and contract expiration dates are examples of regulations or loan terms that are automatically performed when specific criteria are satisfied.
Loans are acquired by exchanging crypto assets for other assets as collateral on a DeFi network. Users may become lenders by depositing their currencies into a DeFi protocol smart contract. They are given native protocol tokens in exchange, such as cTokens for Compound, aTokens for Have, and Dai for MakerDao, to mention a few. These tokens reflect the principal as well as the amount of interest that may be redeemed later. Borrowers trade crypto assets for other crypto assets they want to borrow from one of the DeFi protocols as collateral. To accommodate for unanticipated expenditures and risks associated with decentralized financing, the loans are usually over-collateralized.
Looking to get a cryptocurrency loan? Here’s all you need to know about it.
Total value locked, borrowing, lending
In the decentralized world, one may lend and borrow via numerous platforms, but one approach to assess a protocol’s performance and choose the best one is to look at the total value locked (TVL) on such platforms. The TVL is a measure of the assets staked in smart contracts, and it’s a key metric for evaluating DeFi protocol adoption since the greater the TVL, the more secure the protocol becomes.
Because of the savings given in the form of cheaper transaction costs, quicker execution, and shorter settlement time, smart contract platforms have become a prominent element of the crypto ecosystem, making it simpler to borrow and lend. Ethereum is the most popular smart contract platform, as well as the first blockchain to implement smart contracts. From $18 billion in January 2021 to over $110 billion in May 2022, the TVL in DeFi protocols has increased by over 1,000 percent.
According to DefiLlama, Ethereum accounts for more over half of the TVL, or $114 billion. Because of the first-mover advantage, several DeFi lending and borrowing protocols are developed on Ethereum. Other blockchains, including as Terra, Solana, and Near Protocol, have gained interest as a result of benefits over Ethereum, including reduced costs, greater scalability, and more interoperability.
Aave and Compound, two Ethereum DeFi protocols, are two of the most popular DeFi lending services. However, Anchor, which is built on the Terra blockchain, has seen substantial growth in the last year. The graph below shows the top DeFi lending methods based on TVL.
The transparency given by DeFi platforms is unrivaled by any conventional financial institution, and it also provides for permissionless access, which means that anybody with a crypto wallet may utilize services from anywhere in the globe.
Nonetheless, the DeFi loan area has a lot of room for expansion, and the usage of Web3 crypto wallets assures that DeFi participants keep their assets and have total control over their data thanks to the cryptographic security offered by blockchain architecture.
This post makes no investment recommendations or advice. Every investing and trading choice has risk, therefore readers should do their own research before making a decision.
The author’s views, ideas, and opinions are entirely his or her own and do not necessarily reflect or represent those of Cointelegraph.
CoinDCX, an Indian crypto exchange, was co-founded by Neeraj Khandelwal. Crypto and blockchain, according to Neeraj, may usher in a change in conventional finance. He wants to create tools that make crypto simple and accessible to a worldwide audience. His expertise is in the crypto macro realm, and he keeps a close watch on global crypto developments like CBDCs and DeFi, among others. Neeraj graduated from the famous Indian Institute of Technology Bombay with a degree in electrical engineering.
DeFi is a decentralized lending platform that allows lenders to lend money and borrowers to borrow. The “defi lending platforms” are the companies that will be used for this process.
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