What is DeFi Lending and Borrowing?

DeFi lending and borrowing is a very important and valuable tool for crypto traders and other enthusiasts. Why? You may ask; well, there are several reasons. One of them is due to the crypto space being decentralized and open for all; the second reason could be because it is easier to pay the loaned amount without causing much ruckus for the trader.

Currently, DeFi has generated loads of excitement in the market; while moving ahead and attracting an impressive capital amount since its beginning in 2020. Now, the Total Value Locked (TVL) worth of Decentralized Finance protocols is close to $20.46 billion- which is up from its initial $1 Billion a year ago.

https://twitter.com/CoinDesk/status/1462503598718345219?s=20

What is DeFi?

Decentralized Finance is an online, crypto-backed ecosystem of financial applications based on Blockchain technology, operating without a third-party or central administration intervention. Decentralized Finance operates using a P2P network for establishing and maintaining decentralized applications that allow users to connect and manage their assets wherever they are.

There are various thoughts towards the possibilities of decentralized borrowing and lending; here’s one:

https://twitter.com/TrustlessState/status/1385710606750162946?s=20

DeFi promotes an open-source, transparent, decentralized and free financial service environment. Decentralized finance uses smart contracts as its foundation for self-execution; hence, it doesn’t require any form of control or oversight. Examples of DeFi protocols include Ethereum and Binance Smart Chain; since most of its applications are built on either of these two ecosystems.

Aside from that, various lending platforms and protocols allow users to earn interest on their borrowed assets. DeFi falls under the Decentralized Apps (DApps) section of various crypto platforms; however, it has the highest lending growth rate compared to others. It is also the most prevalent contributor for individuals and investors who seek to lock, stake, and invest their assets.

How To Get A DeFi Loan

Let’s use Binance Smart Chain (BSC) or Binance Coin (BNB) as an example. To borrow BNB under the DeFi lending option, follow the following steps below.

Step 1: Have at least 10–20% of the required loan amount in your wallet. So, if you plan on lending 1 BNB, you would need to have 10 or 20% of its USDT amount in your wallet, say between $50 to $100 worth of USDT.

Step 2: Visit the lending option on Binance App, and select the amount you would like to borrow.

Step 3: Done.

DeFi Lending vs. Traditional Lending

Unlike the traditional method of borrowing, the underlying technology that enables DeFi lending to perform exceptionally is the blockchain. With this type of lending, traders’ assets are easily protected, transparency is assured for every money or cryptocurrency transferred. Borrowing from a DeFi lending-enabled platform is also easier and more straightforward.

Compared to borrowing from your traditional bank, all it needs is for you to create an account with the specified platform. You will also need a crypto wallet and to have opened a smart contract; Decentralized lending offers a censorship-free environment that is open to all and free from preferential treatment.

With an ecosystem as friendly as that, DeFi lending is beneficial tto both lenders and borrowers. It also offers long-term investors room to lend their assets to earn higher interest rates. Users can also use and access fiat currency credit to borrow loans at lower rates and it provides users with the opportunity to sell on centralized exchanges and then lend to decentralized exchanges.

Benefits of DeFi Lending and Borrowing

There are various benefits of lending from a decentralized platform, and they include:

  • Greater Consistency in lending decisions

Unlike traditional lending platforms, DeFi lending platforms are not biased. They have rules that describe credit policies and guarantee consistency in lending decisions. It also eliminates any form of inconsistency in evaluating user attributes and deal structuring.

  • Improved loans origination speed

Decentralized lending offers faster processing speed compared to traditional lending. A typical Decentralized lending platform is backed by a cloud-based service, analytics for fraud detection and machine learning calculations that allow optimum loan terms and risk factors. With the above facilities and attributes, users can easily get their desired loans.

  • Permissionless

As mentioned earlier, cryptocurrencies are decentralized, so they lack connection to the outside world. It allows open, permissionless access, meaning anyone with a crypto wallet can access DeFi applications built on blockchain, regardless of their geographical location and without any minimum amount of funds required.

  • Immutability

A transaction performed on the blockchain cannot be stopped or tampered with due to its decentralized architecture. So, the lender’s data is tamper-proof and secure.

  • Programmability

Smart Contracts can be programmed, automate execution and allow the existence of new assets on the blockchain.

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