Key facts of DeFi lending & borrowing and a unique approach by BuddyDAO
The traditional lending and borrowing system has various challenges and shortfalls like restrictive funding criteria, geographical restrictions, legal issues to access banks, high barriers to loan acceptance, and many more.
In the DeFi landscape, such barriers do not exist as there are no roles for banks. DeFi lending and borrowing protocols serve as liquidity pools that are built on a blockchain network.
- Suppliers supply their crypto assets to the pool and earn interest.
- Borrowers take loans from the pool and pay interest for the same.
This bridges the gaps between lenders who wish to earn extra interest from lending their idle funds and borrowers who wish to borrow loans for productive or investment use.
The Interest Rate Theory
Interest rates are the Annual Percentage Yield (APY) and could be different for all crypto assets. The APY is algorithmically optimized based on the supply and demand of the crypto assets. Eventually, the higher the borrowing demand is, the higher the interest rate (APY) would be, and vice versa.
This reduced the friction between lenders and borrowers by allowing them to interact directly for the interest rates without needing to negotiate loan terms, thereby creating a more efficient financial market.
How Much Effective is the Collateral Loaning Model?
In the collateralized loan model, the borrowers have to supply their crypto assets into the system as collateral. Each asset would have a different collateral factor. The more crypto assets are supplied by the borrower, the higher their borrowing credibility becomes.
If the value of the collateralized assets goes up, their collateral ratio will go up too, and borrowers can draw a bigger loan. But the model doesn’t always great!
If the collateral goes down, the collateral ratio will go down too, and the collateral will be partially sold off along with a liquidation fee. Hence, there are risks involved in collateral-based borrowing.
BuddyDAO comes with a solution to this problem!
BuddyDAO, An Uncollateralized DeFi Lending & Borrowing Platform
BuddyDAO is a DeFi lending and borrowing platform that supports uncollateralized loans hence providing borrowers and lenders with superior digital asset management services with the involvement of a guarantor in between.
All 3 users — the lenders, the borrowers, and the guarantors can take advantage of our highly intuitive platform to supply, borrow, trade, and do much more with their crypto assets. BuddyDAO allows everyone including the unbanked people an opportunity to take an immediate loan by leveraging their personal relationships.
To learn more about BuddyDAO and how it works, read this article.
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