What Is DeFi Lending, and How Does It Work?
DeFi, or, in other words, is decentralized finance. A decentralized approach to work implies the absence of intermediaries.
There are loan offers in the DeFi market, which focuses on the possibilities of freely conducting transactions with digital assets. There are different DeFi lending schemes.
Often the process looks like this:
- Developers are creating a decentralized finance protocol for issuing loans.
- To start issuing loans, the project team needs assets. Developers attract them from market participants. Individuals lock their funds for the needs of the DeFi protocol. In return, the system transfers them part of the money received from the issuance of loans.
At the same time, operations are recorded on the blockchain. Recall that the technology provides secure storage and the impossibility of falsification of data.
Today, in order to get a loan, it is not necessary to go to a bank or a microfinance organization. You can apply for a loan sitting at a computer without intermediaries and providing identity documents. This scheme was implemented in DeFi.
Using open-source DeFi protocols to create decentralized DeFi lending and borrowing platforms is called developing DeFi lending and borrowing platforms. Since DeFi lending is the main use case of DeFi protocols, every cryptography-related company has started to expand its services to provide DeFi-related lending and borrowing services.
The term DeFi refers to decentralized finance, which aims to make an unrestricted, clear and open-source financial ecosystem. DeFi lending is the process of offering and borrowing cryptocurrency assets as a loan in a decentralized environment without permits, which has a decentralized smart contract that automates all transactions for DeFi lending cryptocurrencies without the participation of third-parties.
Platforms that offer these types of credit services are known as a P2P DeFi lending and borrowing platform and more popular decentralized applications (Dapps) are available in the crypto market that provides P2P DeFi lending and borrowing solutions.
What is DeFi P2P?
P2P DeFi lending (peer to peer) is a format of financial relationships in which the lender and the borrower agree without the participation of banking institutions. Now, P2P means DeFi lending through special online platforms. Such a “platform” acts as an intermediary but not as a guarantor or equivalent participant in a mutual loan agreement.
In simple terms, P2P DeFi lending is the provision of money in debt privately through Internet platforms. As a rule, the contract is drawn up in electronic form. It is equivalent to the usually written commitment taken from the borrower. That is, if they fail to fulfill the terms of the contract, the creditor (individual) has the right to apply to the court for compulsory debt collection.
Why Is DeFi P2P in Demand?
But P2P has advantages for both lenders and borrowers. For the first:
- the opportunity to invest your assets profitably (the profit on DeFi lending is several times higher than on bank deposits);
- the administration of the P2P platform monitors the fulfillment of the borrower’s financial obligations (although they are not a guarantor in the legal sense).
For the borrower, P2P is an opportunity to get a profitable loan regardless of his credit history, existing financial obligations.
DeFi-Loans Against Bank Loans
The main difference between DeFi and the traditional financial system is the absence of a centralized management body. Working in this format allows you to abandon many details that are familiar to bank customers. Let’s compare the execution of loans in a traditional credit institution and in the DeFi protocol.
The level of confidentiality.
- Bank: Low. The Bank requests identity documents. At the same time, information about the client can be stored in its database for years.
- DeFi: High. Many decentralized protocols allow individuals to remain anonymous.
The speed of registration.
- Bank: Low. It takes time to check the documents and analyze the risks of DeFi lending and borrowing to the client. In some cases, it takes more than a day to issue a decision on loan approval.
- DeFi: High. You can get a loan in a few minutes.
- Bank: Low. Banks are selective in choosing customers to issue a loan. Bad credit history and other nuances can cause rejection.
- DeFi: High. Almost anyone can get a loan in a decentralized protocol.
- Bank: Low. Traditional banks charge large interest rates.
- DeFi: High. The offers of DeFi lending to decentralized protocols favorably differ in low commissions.
At the same time, it is important to clarify that in the case of the decentralized market, the system can automatically fix the loan terms using smart contracts. This approach significantly speeds up the work and allows you to avoid mistakes made due to the human factor.
How Safe Is DeFi-Lending?
The DeFi-lending platform is quite secure since individuals do not store their funds on the platform, and all transactions are carried out through an open-source smart contract. Thus, the process of DeFi lending and borrowing in DeFi becomes transparent and secure. However, only to the extent that smart contracts themselves are transparent and secure. That is why code testing by an independent audit is the standard for all DeFi projects (lending platform). It is also for this reason that many credit protocols are built on the basis of the Ethereum blockchain since its smart contract is among secure and time-tested solutions. With the help of our team of experts, you don’t have to worry about the security of your project. ICODA will do it for you. Our many years of experience will allow us to create the most secure and advanced DeFi protocols for lending.