DeFi Lending vs Traditional Lending -Which One is A Good Option?
DeFi is the fast-growing industry in the crypto space. The DeFi protocols based on the DApps (Decentralized Applications) are competing with the traditional financial service sector. They utilize smart contract execution primarily on the Ethereum blockchain. With TVL (Total Value Locked) in DeFi passing worth $211.43 Billion (as of April 2022), driven by lending and decentralized exchanges (DEX), we can know there is plenty of capital flowing into liquidity that’s ultimately unlocking new opportunities for financing.
Lending has particularly a huge potential for DeFi. It is also being offered as a service by fintech companies like BuddyDAO as it offers fair uncollateralized loans to borrowers which can be converted from crypto to fiat.
One of the main features of DeFi lending that sets it apart from TradFi is that it offers different requirements compared to traditional creditors who lend money to finance individual and business needs but with plenty of requirements involved. One of the most important requirements of the loan granting process is that the user must have a good credit score. The higher the score, the more capital they can borrow.
On the other hand, DeFi doesn’t have such rules. With platforms like BuddyDAO, users can quickly borrow money without even requiring to put anything as collateral. All they need is to bring a guarantor along who can give assurity of their creditworthiness.
Traditional Lending
In TradFi, banks and other creditors charge a usual interest rate on lending money to borrowers. The interest rate is analyzed based on the credit analysis of the borrowers. Borrowers also need to put something as collateral to secure a loan. It could be the person’s house or automobile or anything that justifies their credit score. Without collateral or an unsecured loan, borrowers will have to pay higher rates of interest on borrowing only the limited funds. The debt owed is then added with the interest compounded depending on the terms by the banks or the lenders.
However, the lender may agree on the installment terms of payments whether it needs to be made monthly, quarterly, semi-annually, or depending on the terms of the loan agreed between both parties.
DeFi Lending
Collateral is applicable in DeFi too. Many platforms like Maker DAO or Compound allow borrowers to put their digital assets as collateral. Additionally, there will be no KYC or third-party approval involved. Once the collateral is provided, users can easily borrow from the platform.
However, in Defi, the collateral doesn’t determine the amount a user can borrow. It depends on the LTV (Loan-to-Value) ratio of how much money is required to borrow against the collateral.
Unlike all other platforms, BuddyDAO works differently. It offers uncollateralized loans to make it easier for users to borrow money in seconds.
BuddyDAO leverages off-chain relationships and works on the guarantor-based DeFi lending and borrowing. It allows borrowers to bring along a guarantor who can assure the creditworthiness of the borrowers.
If the borrower cannot repay the loan or decides to default, guarantors will be responsible.
Final Thoughts and Takeaways
DeFi lending platforms like BuddyDAO offer more opportunities for financial inclusion. They make it an attractive alternative to traditional financial instruments. Borrowers do not need the approval to take loans. They only need to bring a trusted guarantor who they know closely.
There are no credit advisors or agents in DeFi, so borrowers can independently manage their own loans. If you have the collateral or the guarantor, then DeFi can be an easier way to obtain a loan without any third-party approval.
To learn more about the world’s first guarantor-based DeFi lending platform, BuddyDAO, join us here –
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