Decentralized Loans On Blockchain

The world of blockchain is (slowly) reshaping our economy.

Vishva Dave
Mar 3 · 6 min read

Have you ever wondered how much your bank charges you for loans?

When you fill out an application for a bank loan, the bank has to evaluate the risk that you won’t pay them back. They do this by looking at factors like your credit score, the debt-income ratio etc. Based on this information, banks price the risk of default into the fees and interest collected on loans. Once we’ve been loaned, banks charge about 5–8.5% interest rates. Traditionally, the entire application, approval, and funding process typically takes about 7 business days (∵ banks don’t operate on Sundays or public holidays). Not to forget, personal loans charge not less than 12% to 36% interest annually.

Not anymore —

Unless you’ve been living in a cave since 2009, you know what Blockchain is. The world of blockchain is moving rapidly and especially Ethereum, despite having its ups and downs.

makerdao.com

So how are decentralized loans better than traditional loans?

Traditional Loans: You apply for a loan (once you’re ≥18 years old), with something valuable as collateral eg. a house. Provide private information such as name, address, workplace etc for records. It takes about 7 business days for your loan to get approved. Once approved, you will be charged 8–12% annually.

Who issues the loan?

MakerDAO created this thing we call a CDP (Collateral Debt Position). When you lock a certain amount of ETH, you’re allowed to generate 2/3rd of the collateral value (ETH), in the form of a USD pegged DAI Stablecoin.

How is DAI a stable coin?

The DAI stable coin is a MakerDAO product. DAI is fully decentralized, eliminating the need for a third party and offers a stable coin system that is fully backed by the Ethereum platform, MakerDAO whitepaper (highly recommended read). The stakeholders are incentivized to stabilize price whenever DAI is above or below $1.

How exactly does this work?

  1. Open InstaDApp, Connect to your Metamask account or use the inbuilt Metamask integration for hardware wallets (Ledger or Trezor).
InstaBorrow
Keepers track the risky CDPs to liquidate.

Now that we’ve generated DAI, what do we use it for?

Users can deal with the system in diverse ways, opening opportunities for both profit-seeking traders and stability-seeking HODLers to participate in this decentralized ecosystem.

  1. One of the primary use cases of CDPs is margin trading by CDP users. So, you swap Dai with Eth and then lock the Eth to generate more Dai and then repeat again.
  2. You can always convert DAI to ETH and then sell your ETH at LocalEthereum for a good rate.
  3. More DAI user stories depicted here.

About InstaDApp

InstaDApp is a Decentralized Bank built on top of the MakerDAO protocol, making it easy for everyone to interact with the blockchain, especially while taking loans. The team always looks forward to simplifying the experience for non-technical and non-financial users.

InstaDApp

Decentralized Banking.

Thanks to Sowmay Jain.

Vishva Dave

Written by

Content Writer at InstaDApp

InstaDApp

InstaDApp

Decentralized Banking.