DeFi Lending Platform Development

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.

Credit history.

• Bank: Needed.

•   DeFi: Not needed.

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.

Availability.

• 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.

Benefit.

• 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.

DeFi Lending Platforms Are the Future

The DeFi lending market (DeFi lending platform) in many ways surpasses the offers of traditional banks. At the same time, loans in the segment of decentralized finance are still far from the volume of transactions that are executed by classical credit organizations.

One of the reasons why DeFi is lagging behind is the sceptical attitude of users to market opportunities. In particular, the level of popularity of decentralized finance is negatively affected by frequent protocol hacks and a low level of liquidity. It can be assumed that in the future, DeFi will strengthen security and bypass the classic credit market.

Features of DeFi-Lending Protocols

DeFi-lending services or a lending platform have similar functionality to a conventional DeFi lending and borrowing platform, but they also often have some unique features associated with the decentralized nature of the product. Here is a brief description of such features.

External wallet

To take advantage of the capabilities of the DeFi lending platform, the user needs to connect his crypto wallet, which will be responsible for storing the user’s money. For example, the Compound DeFi lending platform is compatible with Metamask, Ledger, WalletConnect, and Coinbase Wallet crypto wallets. The Aave DeFi lending platform provides more features — 30 crypto wallets are now available.

Instant loans

This type of unsecured DeFi lending platform development has gained mass adoption in DeFi thanks to the Aave credit platform. They were the first to introduce the ability to take instant unsecured loans in cryptocurrency. Such loans are issued by smart contract for a limited period, often with restrictions (not to sell or transfer coins until the loan is repaid), and they are automatically canceled if the user cannot repay the loan.

And although term loans are a rather innovative and controversial concept, individuals have already appreciated their advantages. The ability to get a loan almost instantly without collateral provides traders with more options for earning on informational occasions, price discrepancies on different exchanges, etc.

Investment rewards

In order to motivate individuals to provide their funds to the credit platform for borrowing them from other individuals, such platforms provide all investors with a reward in the form of a percentage of the invested funds. And this percentage is usually two to three times higher than the interest on deposits in the USA, Canada, the UK and EU countries. At the same time, the risks are lower than when investing in bank deposits of developing countries.

Switching speed

Rapid rate switching provides borrowers with an ability to select between stable and liable interest rates and thus protect themselves from sudden fluctuations in the cryptocurrency markets, which still remain very volatile. An example of the implementation of this custom option can be seen on the Aave credit DeFi platform.

Fiat Gateway

This feature allows individuals to buy crypto assets for fiat currency, which greatly simplifies the process of adapting newcomers to the cryptocurrency world to this market. In addition, the gateway for fiat also simplifies the integration of credit platforms with third-party tools and apps outside the cryptocurrency industry.

Automation

In the DeFi sector, more routine business processes are automated and standardized through smart contracts (a smart contract). Therefore, investors in DeFi lending may not worry that their payments and/or dividends will be frozen, stolen or transferred to someone by mistake. In addition, automation allows you to develop a mechanism for automatic payment of taxes and other mandatory fees and payments (if required by local laws).