How DeFi Lending and Borrowing Benefits Individuals
The financial area has introduced the need to create blockchain-based financial technology applications. Covering every financial service from cryptocurrency trading to online installments, Blockchain is made to transform the traditional finance system. With the rise of Decentralized Finance or DeFi, Blockchain has become bolder.
DeFi is a financial application based on Blockchain technology that operates without central administration or third-party involvement. It uses a Peer-to-peer system to create decentralized applications that would allow anyone to manage their assets anywhere. DeFi provides a transparent, open-source, and permissionless financial help setting.
DeFi platform offers crypto lending in a trustless way without needing requirements or permission to enroll their crypto coins on the platform for lending. P2P lending is a decentralized platform wherein a borrower can take a loan. DeFi has the highest lending growth rate and is the most predominant patron for locking crypto assets among all decentralized applications (DApps) since the lending practice allows the lender to earn interest.
How Defi Lending and Borrowing Works
According to a paper published in Cornell University, “DeFi loans permit clients to lend their crypto to another user and accrue interest from the loan. Traditional financial services like banks have been using this type of system. The only difference is that in DeFi, anyone can become a lender. A loan provider can gain interest from the loan through lending pools.”
Users can pool their assets and disperse them to borrowers using smart contracts. There are several approaches to distribute interest to financial investors. This is the same with the borrowers as each pool will carry a different methodology on the best way to borrow.
To take a loan using the DeFi platform, the borrower needs to offer collateral that is more valuable than the amount of loan. Just like in banks, for instance for a car loan, the car itself is collateral. When the user stops paying the loan, the bank will seize the vehicle. The same goes with the DeFi system; the only difference is the system is anonymous and does not involve physical property as collateral. In DeFi smart contracts are used to keep this amount of currency of equivalent value to the sum loan. Any crypto token can be used as collateral to trade borrowed cryptocurrency. For example, if a client needs to take one bitcoin, he’d need to store the cost of one bitcoin in DAI.
One company that launched a new lending and borrowing protocol is PARSIQ. The new IQ protocol allows users to earn interest from lending their tokens to other users. Compared to traditional finance, where lenders are limited to centralized entities, blockchain protocols such as PARSIQ allow ordinary users to become lenders.
What are the benefits that DeFi Lending provides to its users?
Greater consistency in lending decisions
Lending decisions are secured by the rules clarifying credit policies. DIfferences in analyzing applicant details and building contracts by underwriters are removed.
Improved speed of loan procedure
“DeFi lending platforms are carried by cloud-based assistance, analytics for fraud detection, and AI computations for ideal loan terms and risk factors. Every one of these advances aids to boost the process. When the loan is validated, lenders send offers through e-contracts,” says Tom Tirman, CEO of PARSIQ, a platform that provides automation solutions for businesses.
Compliance with local, state, and federal regulations
Decision rules provide a record of who, when, and where the rules were used and which rules were in effect. It plays the role of evidence and ensures that the lender complies with federal, state, and local regulations.
Transparency
The public Blockchain accounts for each transaction on the system and is examined by each user on the blockchain network. This transparency level about transactions allows productive data analysis and guarantees verified access to each user on the system.
Permissionless
DeFi lending enables permissionless access. Any person using a crypto wallet has access to DeFi applications created on Blockchain no matter where they are and without any requirements of the minimum amount of funds.
Self-custody
The use of Web3 wallets (like Metamask) ensures that Defi market participants keep strong custody of their assets and control their data.
Interoperability
The use of an interconnected software stack ensures that Defi protocols and applications integrate and complement one another.
Conclusion
DeFi lending is a big help to the financial services sector. Both the lender and borrow benefit from this type of system. It aims to decentralize traditional finance services like lending and borrowing. Defi lending being involved with the intriguing technology truly has vast opportunities to revolutionize the global financial landscape.
