DeFi is referred to as decentralized finance which is an ecosystem of different financial applications based on blockchain technology. It operates without any kind of intervention of central or third-party administration. The system makes use of a peer-to-peer network for the establishment of decentralized applications enabling the users to connect as well as manage their assets irrespective of their location and status. The aim of DeFi is to provide an open-source, permissionless, and completely transparent financial service environment. It is the smart contracts that lay the foundation for DeFi loans or finance since they are entirely self-executing and do not need any intermediary oversight.
Concept of DeFi Loans
After an idea of Decentralized Finance (DeFi), let us focus on DeFi loans. DeFi loans are basically crypto loans offered by DeFi lending platforms in a trustless manner that is without the involvement of any kind of intermediaries, thereby allowing users to enlist their crypto coins on the platform for the purpose of lending. A borrower can directly take a loan via decentralized platforms which are referred to as peer-to-peer lending. Moreover, the lending protocol is such that it allows the lender to earn interest.
Mechanism of DeFi Loans
Let us now understand the mechanism of DeFi loans to see how it really works. The steps are mentioned below:
Step 1 – The lender deposits fiat currency on a DeFi lending platform.
Step 2 – The borrower deposits crypto assets as collateral for obtaining the loan.
Step 3 – Once the assets are deposited, the lending platform provides the borrower with crypto loans.
Step 4 – Now, the borrower repays the loan with interest.
Step 5 – After repayment of the loan is complete, the borrowers get back the collateral.
Step 6 – Finally, the lender receives the funds back with interest (passive money) from the DeFi lending platform.
Benefits of DeFi Loans
DeFi loans come with a number of benefits that cannot be obtained in the case of traditional loans. Let us read through to understand what DeFi loans have on offer.
· Speed of Loan Origination is Readily Improved
With DeFi loans, the speed of processing of loans is superior since the entire process is digitally enabled. The DeFi lending platforms are backed by cloud-based services, the right set of analytics for identification of fraud, machine learning for calculation of optimum loan terms as well as risk factors. The use of all these technologies plays a significant role in speeding up the entire lending process. Once the loan is approved, the lenders send offers through e-contacts.
· Increased Consistency in Lending Decisions
The rules that describe the credit policies provide guaranteed consistency in the lending decisions. In DeFi loans, there are no underwriters involved and hence variations in evaluating the attributes of loan applicants and the structured deals by the underwriters are eliminated, thereby bringing about an increase in the consistency of lending decisions.
· Proper Compliance with Set Regulations
The decision rules in DeFi loans provide a detailed record of each of the rules that were in effect during the process of lending. This, in turn, plays a major role in providing proof and makes sure that the lender complies with the set regulations in the state, country, or locality.
· Set of Analytics for an Improvement in the Process and Profitability of Portfolio
The set of analytics presence in DeFi loans helps both borrowers as well as lenders to get the most out of the digital lending process. Monitoring the applications for loans over a certain duration like a week, month, or year can assist lenders in anticipating and allocating proper resources for accommodating the seasonal loan demands. Moreover, analytics also help provide deeper insights into loan sources, demographics, credit tiers, and many more useful elements. In this way, the portfolio of the borrowers can be improved by judging how the characteristics of borrowers and the credit policies affect the performance of loans.
· Devoid of Permission
DeFi loans provide open access without any permission. It means that anyone possessing a crypto wallet can access the DeFi lending applications built on blockchain irrespective of their location on the globe and without any minimum amount of requirement of funds.
· Completely Transparent
Blockchain is public and broadcasts each transaction on the network and is verified by each of the users on the network. This high level of transparency around every transaction provides the scope for rich data analysis, thereby ensuring verified access to each of the users on the network.
· Immutable, Programmable, and Interoperable
The decentralized architecture of blockchain makes sure that there is tamper-proof data coordination along with enhanced auditability as well as security. Smart contracts are highly programmable in nature. They can be executed automatically and enable the creation of new assets as well as financial instruments. The use of an interconnected software stack in blockchain makes sure that each of the DeFi protocols & applications appropriately integrates and complements one another.
The DeFi market plays a crucial role in helping participants keep very strong custody of their assets and control their data without any hindrance.
Top DeFi Lending Platforms
Now, the readers have a detailed understanding of DeFi loans, their mechanism, and their benefits. So, let us have a look at some of the top DeFi lending platforms.
88mph – The platform 88mph allows the users to lend their crypto assets at a fixed rate of interest.
Alchemix – It is a synthetic asset platform backed by future yield. Here the users can get quite flexible instant loans that repay themselves over time as well as community DAO. This DeFi lending platform actually advances the yield of farming with the help of a synthetic token that represents a fungible claim on any underlying collateral in the protocol of Alchemix.
Compound – It is an open-source and autonomous protocol built for the developers enabling algorithmic as well as efficient money markets or ETH or Ethereum.
Liquidity – It follows a decentralized borrowing protocol that allows the users to draw interest-free loans against Ethereum used as collateral for the loan.
Torque – Torque is an extremely powerful DeFi lending platform for borrowing assets with indefinite term loans along with fixed rates of interest.
Venus – This DeFi lending platform is an algorithmic money market and based on synthetic Stablecoin protocol on the Binance Smart Chain.
Future of DeFi Loans?
The in-depth discussion regarding DeFi loans gives a very clear indication of the scope they have in the time to come. These loans have the potential to revamp the entire financial system. At the same time, this system attempts to decentralize the core traditional financial services such as investments, trading, payments, borrowing, lending, and insurance. Decentralized finance and lending being associated with the fascinating technology certainly have an array of opportunities that can simply revolutionize the financial landscape globally.