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What is DeFi Lending? A Complete Guide

by

Gurpreet Singh

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20 MIN TO READ

March 8, 2024

What is DeFi Lending? A Complete Guide

by

Gurpreet Singh

linkedin profile

20 MIN TO READ

March 8, 2024

Table of Contents

Decentralization has been one of the driving forces behind the immense advancement of technology. With the use of blockchain technology that stores data on publicly available ledger via consistent blocks, decentralized finance (DeFi) contributed to the diversification of the financial market. 

Starting from cryptocurrency, it has multiple areas under effect, including non-fungible tokens (NFTs), metaverse, web3, etc. In the cryptocurrency market, Ethereum (ETH) stands out as the top crypto asset with the most total value locked (TVL) of 46.382 billion USD as of February 2024. It reflects the total amount of USD people have invested, staked, or stored in cryptocurrency. 

With this massive capital in the crypto domain, DeFi lending becomes a lucrative way of making money with your digital assets. If you are interested in learning more about it, you will find relevant information about DeFi lending and borrowing platforms and how to get started with them. 

The Rise of DeFi

Blockchain technology emerged as an advancing technology with its state-of-the-art applications in multiple areas. It has a distinctive role in the financial sector, amplifying its outcomes and functionality by offering a peer-to-peer (P2P) network for financial transactions. Decentralized finance or DeFi is a system based on blockchain technology. 

Working on smart contracts, DeFi ensures transparent and permissionless financial transactions. It also cuts off the necessity for intermediaries and authorities, such as banks and government institutions to validate your digital assets. Therefore, it has gained momentum in worldwide market acceptance. Cryptocurrency, NFTs, etc., are some of its real-world applications that promise interoperability and seamless asset management. 

Increased contributions of blockchain in finance pave the way for more products and services, leading to the popularity of DeFi lending and borrowing. It is necessary since the DeFi market has experienced many ups and downs in a few years. Reaching at its peak of 7.5 million active users in 2021, it has gone through disrupted market growth with only 2.497 million unique users in December 2023, according to Statista. 

DeFi Lending – Overview

In the conventional monetary system, an individual or organization hands over the control and supervision of their owned assets to a central authority, mainly banks and public sector organizations. People invest their money with banks to earn a fixed passive income annually via their saved financial funds. 

According to a report on The Business Research Company, the global lending market is growing at a rate of 8.8 percent, expected to reach a staggering 12176.98 billion USD by 2027. The main factor behind this massive increment is the adoption of digital solutions in money matters from conventional banks. 

However, DeFi works on self-custody principle, meaning that a person has complete control over their digital assets, including crypto assets, NFTs, etc. It allows them to invest their funds into a DeFi platform to offer DeFi crypto loans to the borrowers. In this DeFi lending process, crypto lenders earn financial rewards and increase their digital assets over time. 

Working of DeFi Lending

Getting value out of your digital assets, such as cryptocurrency, is through multiple ways. After owning crypto, you can trade it on various crypto trading platforms, including Binance, Coinbase, etc. Moreover, you can stake your digital assets on these platforms to earn annual income through interest or platform rewards. 

However, DeFi lending is a lucrative method of increasing your assets’ value by offering them to a crypto lending platform where borrowers can make good use of them. DeFi loans function similarly to conventional bank loans. However, it differs in one aspect that is decentralization, making it a trustless process. By trustless, it doesn’t mean to be risky to a higher extent, but rather intermediaries do not interfere or look after your lended assets. 

To offer crypto loans, you must pool your digital assets on a DeFi platform, such as MakerDAO, Aave, and so on. These platforms have smart contracts in place, helping you in transparency and permissionless distribution of your funds to borrowers. Like bank loans, DeFi loans also demand collateral with anonymity. In other words, loan takers must offer something collateral to receive funds through smart contracts that keep the process fair, secure, and anonymous. 

Perks of DeFi Lending

lending pool

With a self-custody lending system, the question is, why would someone stake their assets in DeFi platforms for DeFi loans? It is due to the lucrative benefits it provides lenders with. The interest rates of crypto loans are higher than fiat currency. 

Moreover, cryptocurrency is highly volatile, which makes crypto holders worry about losing its value. Nevertheless, it is always beneficial to get some returns on your digital assets instead of keeping them idle in your crypto wallets. 

Thus, the crypto lending and borrowing market has seen a productive uptick in its user count, emerging as an essential economic vehicle. Here are a few advantages of DeFi lending for lenders and borrowers. 

1. Data Analytics

Thanks to the digital transformation in the present era, data assessment is no more an issue. From the pooling of your crypto assets to the transfer of funds to the borrower, DeFi platforms save every piece of data. With data analytics, monitoring your assets becomes convenient. 

Data analytics also help DeFi loan-providing platforms to optimize their services by assessing existing insight. Moreover, it also supports borrowers for seeking loans in the future. As they pay their crypto loans, they build a portfolio and reputation on the marketplace, allowing other investors to distribute their assets to trustworthy and non-defaulter. 

2. Speed and Instant Money

One of the drawbacks of bank loans is funds availability, as they have to undergo a long process of third-party approvals and authorizations. DeFi lending is quick, instant, and on-time since it lacks the middle person. It is directly between the lender and the borrower. 

Furthermore, the digital and cloud-driven nature of DeFi platforms ensures faster delivery of services regardless of locality and credit history. Therefore, crypto loans are more viable than bank loans. 

3. Immutability and Transparency

Blockchain technology stores information and transaction records on a public ledger. It not only allows lenders to assess and analyze the assets but also contributes to the matchless security of their holdings. In financial matters, accountability and transparency play a crucial role, and blockchain guarantees them to the fullest. 

Additionally, DeFi applications are immutable due to its established network. The stringent validation of data refrains a single person from hacking or modifying the record stored on the blockchain because of the network. It requires every member of the network to approve the change, making it a challenge for hackers or malicious actors to alter loan data or lending policies. 

4. Interoperability

DeFi platforms function on smart contracts with robust programming. Smart contracts are well-programmed documents on the blockchain network that approve several actions, such as financial transactions, requests for data change, etc., on the blockchain automatically without any member of the network. In other words, it is an automated system for faster and more reliable digital asset management. 

The best thing about DeFi lending is that smart contracts allow interoperability by interconnecting the best crypto wallets together. It offers multiple features for convenience and improved user experience in a single platform. 

Best DeFi Lending Platforms

lending defi

Getting started in the blockchain-powered domain requires market-oriented knowledge and expertise. The crypto market has multiple advantages for newcomers and seasoned traders and investors, promising lucrative gains. 

However, it also offers risks of losing your fortune. Therefore, industry-standard research and knowledge are essential before jumping into the diverse crypto ecosystem. In cryptocurrency, investing your assets in DeFi platforms is profitable. The saturated market with myriads of lending platforms has presented lenders with difficulties as to which platform will be the best. 

The following are some of the best-decentralized lending platforms. 

1 Aave

Founded on a popular Ethereum blockchain, Aave is one of the top DeFi lending platforms. Since Ethereum blockchain equips Aave with multiple benefits, it is renowned for its non-custodian and trustless crypto lending services. It comes with every feature that a blockchain possesses, such as governance, transparency, tokenization, and so forth. 

It is home to two native tokens: AAVE token and LEND. The former is the lending token that offers interest, while the latter is a governance token, meaning that Aave users can utilize their tokens to approve changes and modifications in the platform. However, it has support for various crypto assets like Ethereum, Chainlink, USD Coin, Wrapped BTC, and many more. 

Aave is the leading decentralized lending protocol due to its provision of diverse loans, including uncollateralized, rate switching, and collateral lending. Moreover, the interest rate differs based on the type of loan and selected crypto tokens. Regarding returns, stablecoins or dollar-backed crypto tokens, such as Tether (USDT), have returns up to 12 percent. 

2 Compound Finance

It is another important blockchain platform that also offers decentralized loans to crypto enthusiasts. Its foundation is laid upon Ethereum, which enables users to enjoy vital functionality of DeFi, such as permissionless, transparent, and secure operation. 

When you deposit supported crypto holdings into Compound, you get tokens that you can lend to crypto borrowers. Furthermore, they can also trade the deposited assets, promising high returns. Among the supported crypto tokens, BAT, DAI, USDC, USDT, etc., are the top. 

3 MakerDAO

Decentralized autonomous organization (DAO) is an essential advancement in blockchain technology that benefits businesses by eliminating the role of corporate hierarchy. MakerDAO is the leading name in DeFi lending and borrowing, as it has introduced a distinctive system for automated and secure crypto loans. 

With its multi-collateral Dai (MCD) system, bringing control in the crypto world became easier for organizations. Controlling cryptocurrency means tackling the volatility of digital assets with agility and care. Therefore, MakerDAO introduced its stablecoin, DAI, in the crypto market, which has market reserves pegged with US dollars. 

If you want to start lending your crypto assets to MakerDAO, you can use its native crypto token, DAI. Founded on the Ethereum blockchain, it is safe and rewarding to stake your assets on it, offering scalable interest rates on your deposits. 

Conclusion

In the financial landscape, lending funds help in improving businesses and organizations in scaling. DeFi lending has revolutionized how we bring innovation in money matters. By offering seamless and instant funds to borrowers, including retailers and institutions, eases business operations. Embracing crypto loans demands a well-established DeFi lending and borrowing organization. 

If you are interested in advice about the best platform, you can consult with our expert team. We at Debut Infotech offer blockchain-related tailored services to individuals and businesses that include DeFi development, decentralized apps (dApps), Web3, NFTs, etc. 

Debut Infotech is a top-notch blockchain development company that hosts vetted blockchain developers, helping enterprises streamline their operations with modern tech solutions. In addition, you can keep yourself updated with advancements in the blockchain space by reading our blog posts about the above-mentioned subjects. 

FAQs

Q. How does DeFi lending work?

A. DeFi lending involves a lender, a borrower, and a DeFi exchange platform. A lender deposits their assets to the platform to offer them to borrowers as collateral loans. Borrowers receive crypto loans without credit checks at specific interest rates for a set duration. They must pay back the loan to avoid complications, helping crypto lenders gain financially with the intact value of their assets. 

Q. Is DeFi lending and borrowing risky?

A. A risk of late payment or default always comes up with crypto loans that frustrate lenders. Moreover, the lending process happens on lending platforms, imposing risks of cyber threats, including hacks, scams, and wallet-draining. Therefore, you must consider safety measures while choosing a platform when offering DeFi loans. 

Q. How to lend crypto?

A. Getting started with crypto lending does not demand top-notch skills or technical knowledge. With plenty of DeFi platforms that support lending and borrowing, you just need to sign up and deposit the supported digital asset to the platform, permitting it to be offered to trusted borrowers. 

Q. Is lending crypto profitable?

A. Crypto lending helps significantly in generating revenue for the lender. DeFi lenders offer loans at lower interest than conventional banking systems, attracting myriads of borrowers. Since they will pay back the borrowed assets with profits, it is more profitable than keeping them in your crypto wallets. 

Q. Is crypto staking and lending the same?

A. Though both terms interchange sometimes, they are not the same. Lending your digital assets involves leasing them out to a borrower or individual seeking funds. On the contrary, crypto staking is keeping your money on a blockchain for a specific time to get passive income or interest. Both methods offer lucrative benefits to the asset owner.

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March 26, 2024

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