Traditional financial systems offer debt-based financial instruments that take a long time to produce what one can call a reasonable return. These instruments, such as bonds, debentures, etc., usually take a long period before they can be redeemed for paltry returns, but they have kept prominence because of their “security”. However, a game-changer in the world of financial securities is crypto lending.
Crypto lending is a financial service offered by decentralized applications that enable investors to gain considerably higher returns of investment (ROI) on crypto-assets by giving out their assets to receive interests as fees paid by lenders. This system is centred on decentralized finance (DeFi) and it is one of the most popular areas of DeFi.
Decentralized Finance (DeFi)
DeFi is one of the most radical products of the application of tech to finance. It is an advancement of the banking systems, payment systems and financial services sector because of its “distributed” nature.
Decentralized finance is the transaction of financial activities without the need for third-party institutions.
All kinds of banks and payment corporations etc have been major players in the economy of any state. From the days of the storage and merchant services that the Medicis provided, these establishments have grown to mammoth sizes and have become indispensable to everyday transactions. They became central to the conduct of businesses because of their ability to facilitate the transfer and storage of value.
DeFi seeks to achieve the same goals, but without highly centralized bodies. It seeks to accomplish seamless transfer and storage of value without sacrificing the principles of security. DeFi is a form of an economy “by the people, for the people, and of the people”. This is through its peer-to-peer system, where transactions are carried out directly between the two parties involved.
Smart Contracts are the computer programs that ‘administer’ and facilitate dApps (decentralized apps, and they are run on blockchains — majorly the ERC20. They use advanced algorithms to carry out their functions.
These contracts are procedures that can execute their programmed tasks by themselves based on certain protocols.
These protocols determine the interest rates of liquidity pools. They determine “who” gets “what” and “when”, in lending transactions. Their digital form and the blockchain they are based on make them credible and efficient.
Popular DeFi Lending Platforms
Advantages of DeFi Lending
This looks at the benefits that DeFi lending services offer as opposed to merchant banks:
- Higher Returns (because of higher interest rates)
- Absence of third-party human institutions vulnerable to compromise.
Future Of DeFi
The automation of previously frustrating and uncertain financial activities and processes, along with the ease that comes with it, is the factor that makes the advent of cryptos and blockchain a turning point in the financial system. The absence of the need for third-party administrators, regulators and financial gateways is going to lead the charge for the triumph of cryptocurrencies and blockchain tech, as the world’s populace becomes increasingly cautious of their data and seeks to protect their privacy which the computer and the internet have severely assailed.