DeFi transforms lending paths on the blockchain.


The world of Decentralized Finance (DeFi) is gradually expanding to include a significant portion of the global financial lending space thanks to its inherently unreliable operating practices and ease of access to capital. As the cryptocurrency ecosystem grows into a $2 trillion industry with a market capitalization, new products and offerings have emerged thanks to burgeoning innovations in blockchain technology.

Lending and borrowing have become an integral part of the crypto ecosystem, especially with the advent of DeFi. Loans and loans are one of the core offerings of the traditional financial system, and most people are familiar with the term in the form of mortgages, student loans, etc.

In traditional borrowing and lending, the borrower makes a loan to the borrower and receives interest in return for taking the risk, while the borrower provides assets such as real estate, jewelry, etc. as collateral to obtain the loan. In traditional financial systems, these transactions are facilitated by financial institutions such as banks, which take steps to minimize the risks associated with providing loans by performing background checks such as customer identification and credit scores before loans are approved.

Relevant: Liquidity has driven DeFi’s growth to date. So what about the future prospects?

Borrowing, Lending and Blockchain

In the blockchain ecosystem, lending and borrowing activities can be carried out in a decentralized manner where transaction parties can transact directly with each other through smart contracts, without intermediaries or financial institutions. A smart contract is an auto-executing computer code with specific logic that contains (coded) transaction rules. These rules or loan terms can be fixed interest rates, loan amounts, or contract expiration dates, and are automatically executed when certain conditions are met.

Loans are obtained by collateralizing crypto assets on the DeFi platform in exchange for other assets. Users can deposit their coins into a DeFi protocol smart contract and become a lender. In return, native tokens are issued for protocols such as Compound’s cTokens, Have’s aTokens, or MakerDao’s Dai. These tokens represent the principal and the amount of interest that can be repaid at a later date. Borrowers offer their crypto assets as collateral in exchange for other crypto assets they wish to borrow on one of the DeFi protocols. Typically, loans are over-collateralized to account for the unexpected costs and risks associated with decentralized finance.

Relevant: Are you looking for a cryptocurrency loan? Here’s what you need to know:

Borrowing, Loan and Total Value Fixed

In a decentralized world, you can borrow and borrow through a variety of platforms, but one way to measure the performance of a protocol and choose the right protocol is to look at its fixed total value (TVL) on that platform. TVL is a measure of assets staked in smart contracts and is an important indicator used to evaluate the scale of adoption of DeFi protocols as higher TVLs make the protocol more secure.

Smart contract platforms have become a major part of the crypto ecosystem, making borrowing and lending easier due to the efficiencies offered in the form of lower transaction costs, faster execution speeds and faster settlement times. Ethereum serves as the dominant smart contract platform and is also the first blockchain to introduce smart contracts. TVL of DeFi protocol is adult From $18 billion in January 2021 to more than $110 billion in May 2022, an increase of more than 1,000%.

92e48823 bb38 4509 8765 8072cabfd8b1

ethereum disturbance According to DefiLlama, $114 billion, an increase of more than 50% of TVL. Many DeFi lending and borrowing protocols are built on top of Ethereum due to first-mover advantage. However, other blockchains such as Terra, Solana, and Near Protocol have also gained traction over Ethereum due to certain advantages such as lower fees, higher scalability and interoperability.

Ethereum DeFi protocols such as Aave and Compound are some of the most popular DeFi lending platforms. However, one protocol that has grown significantly over the past year is Anchor, which is based on the Terra blockchain. The top DeFi lending protocols based on TVL can be seen in the graph below.

056f8722 6c70 4492 9b5b 22f7d4820396

The transparency provided by the DeFi platform is not only unmatched by traditional financial institutions, but also allows unauthorized access, allowing any user with a crypto wallet to access the service from anywhere in the world.

Nevertheless, the growth potential of the DeFi lending space is enormous and the Web3 crypto wallet allows DeFi participants to retain their assets and have full control over their data thanks to the cryptographic security provided by the blockchain architecture.

This article does not contain investment advice or recommendations. All investments and trading involve risks and readers should do their own research when making decisions.

The views, thoughts and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent those of Cointelegraph.

Niraz Kandelwal He is the co-founder of CoinDCX, an Indian cryptocurrency exchange. Neeraj believes that cryptocurrencies and blockchain can revolutionize the traditional financial space. He aims to create products that make cryptocurrencies easily accessible to a global audience. His area of ​​expertise is in the crypto macrospace and he has a keen eye for global crypto developments such as CBDC and DeFi. Neeraj holds a degree in Electrical Engineering from the renowned Bombay Institute of Technology in India.

Leave a Comment