How to Develop a DeFi Lending Platform
DeFi lending/borrowing solutions along with decentralized exchanges are now among the top 5 projects with maximum locked-in value (in USD), according to DeFi Pulse. In this article, we’ll tell you how to build a DeFi lending platform using the best blockchain development practices.
How does DeFi lending work
Financial services have undergone significant changes in recent years. The use of blockchain technology lets us create a completely new market aiming to solve the problems of traditional systems. And at the forefront of innovative solutions is DeFi, offering us a new perspective on financial management. Lending/borrowing platforms have become one of the most popular types of DeFi projects due to the clear benefits for users over their centralized counterparts. And before we go to these advantages let’s figure out how DeFi lending works.
DeFi lending platforms allow users to lend and borrow crypto assets. Unlike traditional systems where a platform gives a loan to a borrower, DeFi provides peer-to-peer lending between network participants, eliminating the need for third-party involvement. The lending protocol allows lenders to earn interest. Plus, DeFi lending platforms often provide an opportunity for long-term investors to earn higher interest rates. Therefore, both borrowers and lenders benefit from this model.
One of the main advantages of DeFi is that anyone can become a lender and earn interest. Also, any user can become a borrower by signing up for a platform and connecting a crypto wallet. So this is how it works.
Loans are disbursed through self-regulatory smart contracts without any intermediaries. Borrowers pay a different interest rate for borrowing cryptocurrencies. And the interest that borrowers pay generates the interest that lenders receive. To start the process of obtaining a loan, a user deposits crypto assets as collateral. For example, if the user needs to borrow one bitcoin, he can deposit the price of one bitcoin in DAI, etc.
Now that you know how DeFi lending works, we can move on to the benefits of DeFi lending platforms. Among the main benefits of DeFi loans are the following:
- Improved borrowing speed. With DeFi, you can get a loan very quickly thanks to automated processes using smart contracts. All you need to do is connect your wallet to a DeFi platform and request a loan. Without intermediaries and any identifications, transactions go through almost instantly.
- No intermediaries. Self-executing smart contracts allow lenders and borrowers to establish agreements directly. The absence of intermediaries in the form of banks and other financial institutions speeds up the process of issuing loans and allows borrowers to borrow funds at lower interest rates, and lenders to receive higher returns.
- Permissionless. DeFi is an open and transparent ecosystem that anyone with a crypto wallet can join. Regardless of geographic location and credit history, you can act as a borrower or lender by meeting the basic requirements of a platform.
- Transparency. DeFi has the highest level of transparency that maintains user trust. Built on public blockchains, DeFi lending platforms allow any user to review the smart contract code and see how the system works.
- More control over crypto assets. It is no secret that some centralized platforms can lose user funds due to system errors or hacker attacks. With DeFi, users are the custodians of their funds, which gives them more control over their assets and personal data.
So as you can see, DeFi lending gives users more freedom and profit in managing their crypto assets. The inclusion of P2P transactions allows you to reduce costs and speed up the process of issuing loans. In addition, the members of the network remain anonymous.
DeFi lending vs CeFi lending
Decentralized finance emerged as an alternative to centralized finance or CeFi. The main difference between DeFi and CeFi is the lack of central authorities in decentralized platforms. Let’s take a closer look at the other differences between CeFi and DeFi lending to find out the cons and pros of both mechanisms.
CriteriaCeFi lendingDeFi lendingAccessDetermined by a platformPermissionlessKYC requirementsRequiredNo need for KYCFunds CustodyPlatformUserControlCentralized authoritiesNot controlled by centralized authorities Loan disbursement speedLowerFasterPlatform examplesBlockFi, Nexo, CelsiusCompound, Maker, Aave
DeFi lending is very different from CeFi. Firstly, when using a DeFi platform, no one can forbid you to become a member of the network and taking a loan if you have provided the necessary collateral. While in centralized platforms, the moderator can approve or decline a loan request. Secondly, an important advantage of DeFi is that users themselves act as custodians of their assets, which removes responsibility from the platform and increases the level of user confidence.
DeFi lending platform features
If you decide to figure out how to build a DeFi lending platform, start with must-have features. DeFi lending services have similar functionality to regular lending platforms, but they also have unique features associated with the decentralized nature of the product.
First of all, in order to start using a DeFi platform, users must connect their crypto wallets. Therefore, you need to make a list of wallets that your platform should support. For example, Compound allows users to sign up with Metamask, Ledger, Wallet Connect, Coinbase Wallet, and Aave platform provides more options. Decide which integrations you need.
After connecting a wallet, the user can start using the core functionality of the platform. Let’s take a closer look at the main features of DeFi lending apps.
Flash Loans
Flash loans are a type of uncollateralized lending that has gained popularity thanks to the rise of DeFi lending platforms like Aave and dYdX. Thanks to this feature, users have the ability to borrow without providing collateral, but this loan has a limited duration and is automatically canceled if the user cannot repay it. Regulation takes place using smart contracts that don’t allow the transfer of funds if the conditions laid down in them haven’t been met. So the borrower must pay off the loan before the transaction is completed, otherwise, the smart contract will cancel it.
