Blockchain and cryptocurrency technology has truly come a long way. It’s also increasingly disrupting other industries in ways that not many would have predicted. Today, Decentralized Finance (DeFi) is one of the hottest and most valuable applications of blockchain technology. In this space, lending and borrowing had not been heard of until new players got into the industry to shake things up. The traditional gatekeepers of loans in the modern world have been banks. However, during the COVID-19 crisis, platforms that deal with decentralized finance, and this sort of borrowing got a massive boom. According to Reuters, this kind of loan has become more popular than ever.
For instance, the number of loans has risen nine-fold up to $9 billion as of September 2020, whereas it was at about $1 billion at the beginning of the year. Just like a normal bank, cryptocurrency assets have all the same features, all of which come in a decentralized form. This means that lending, spot trading, borrowing, and even margin trading is possible, provided you have the necessary skill. DeFi loans are already transforming the world of finance. Unlike traditional bank loans, you have to apply and go through several checks to finalize. But with DeFi crypto lending, you can be certain that you don’t have to jump through all these hoops to get your loan.
How DeFi loans work
Just like money in a suitcase, cryptocurrency assets don’t accrue interest. Although the underlying value may go up or down due to volatility or what’s going on in the markets. You don’t earn anything by holding onto a cryptocurrency, and as such, this is where DeFi loans come into play. Normal banks consolidate money from various accounts and offer them to businesses and individuals at a particular interest rate. With DeFi, on the other hand, anyone with crypto assets can become a lender and therefore gain interest when the loans are being paid off. Although the two might seem similar, DeFi has the advantages of blockchain technology that give it an edge over the traditional institutions.
In normal banks, a loan is given when the borrower has presented some collateral so that in case they don’t fulfill their financial obligations, the institution is not left in the red. Since there is always an element of anonymity in blockchain transactions, DeFi loans rely on contracts and relevant laws to keep parties honest.
DeFi Crypto lending
In this space, there are two types of lenders. The first type is those that require collateral that’s equally or more valuable than the amount in question. While the second type is those that provide unsecured loans altogether. In the case of unsecured loans, the lenders create a profile of the person based on their patterns to determine what sort of financial risk the person is. Secured loans, on the other hand, are much different since the value of the collateral has to be a bit higher to cover the lender’s risk in case of a default.
For instance, someone who wants to borrow 1 Bitcoin will need to deposit an amount similar in value, in our instance, $11,000. When you are done with the loan, you can pay the 1 Bitcoin plus the extra amount to the lender and consequently get back your $11,000. This means that if you make wise investments, come payback time; you’ll give back the Bitcoin and have something left as profit. The interest acquired is then distributed in the pool where investors can get their share.
DeFi technologies are continuously being refined and made better. A lot of DeFi projects are being launched recently with the inclusion of DeFi crypto lending. This means that the future is bright. As more innovations come up, more people will have access to funds to improve their lives. Also, to make a better future for themselves and their loved ones. However, before you take a crypto loan, you must do your homework first to ensure you don’t lose your money.