Decentralized Finance (DeFi) has reached greater success and transformed the traditional environment by enabling unbordered and permitless transactions. Nowadays, DeFi lending platforms play an important role in the place of the DeFi empire.
You will be shocked to know that nearly twenty billion dollars (approx) are locked in DeFi protocols. This number proves that the popularity of DeFi applications has grown significantly. DeFi lending is one of the most advanced areas of the cryptocurrency space. These loans allow crypto holders to lend their digital assets and earn lucrative interest.
Right, let me tell you what DeFi lending is and how it works now.
What is DeFi Lending Platform and How Does It Work?
A DeFi lending platform is software that works like a bank but without any central authority. It is a decentralized system where users can lend and borrow funds without any middlemen like traditional banks. These services utilize blockchain networks and smart contracts to make automated and transparent loan and borrowing procedures.
Simply, it focuses on crypto loans. Here, the users can easily lock their digital assets without thinking about any intermediaries, and they can acquire some interest by lending their crypto assets or obtain liquidity by borrowing against their collateral. The borrowers can easily take loans from the decentralized platform with the help of peer-to-peer lending.
The interest for lenders has settled automatically with the help of smart contracts.
Ok, you explored an overview of the DeFi lending platform. Now let us take a deep look at the difference between DeFi lending and traditional lending.
How is DeFi Lending Different From Traditional Lending?
Traditional Lending
Basically, traditional lending generally consists of a financial organization, like a bank or credit union, issuing a loan to either a person or a business. The person who borrows from banks needs to finish the application process like he/she must submit personal and financial details like credit history, documents of assets, and income.
Then the lender verifies the borrower’s information to conclude the person’s creditworthiness and the lender uses this data to understand the borrower’s creditworthiness, loan terms, repayment period, interest rates, and any collateral that might be necessary for the loan.
Traditional finance ensures the credit score, collateral, and reputation of the person before lending to the borrower.
DeFi Lending
DeFi lending is slightly opposite to traditional finance, here it evaluates collateral instead of credit history. The DeFi lending takes collateral as the loan repayment assurance.
DeFi lending uses smart contracts to handle crypto funds. A smart contract is a program that works on blockchain networks like Ethereum, Binance, etc. It can handle bookkeeping, archive digital funds, and make transactions when specific events take place.
Using these protocols, helps users to lend or borrow funds through the DeFi lending platform without any involvement of third persons. In contrast to banks here, users borrow funds from a pool of lenders, who provide loans at a pre-planned rate of interest.
Here the loan agreements are handled in a decentralized way with smart contracts, and the loan repayments are generally made through digital assets.
Well, it’s better if you take a look at the pros and cons of DeFi lending.
Pros and Cons of DeFi Lending
Let’s start with a positive first.
Pros of DeFi lending
- DeFi lending helps to make loans that are available to anyone with crypto collateral.
- Here, the loan takers can borrow funds without any fixed repayment rules.
- The interest rate in DeFi lending is lower when compared to traditional lending.
- Borrowers can use their borrowed funds for any purpose.
- Borrowers are able to get loans very quickly using DeFi lending.
It’s essential to know about both sides, so let us see the cons.
Cons of DeFi Lending
- When you take out a loan, you need to return it in the same cryptocurrency you borrowed, and there could be some extra costs and trades involved.
- Fluctuations in the market can lower the worth of collateral, which might lead to a liquidation situation.
Right, you have explored the pros and cons of DeFi lending. Many people show interest in taking loans on the DeFi platform and most people have a doubt about how can borrow with DeFi. So let me give a answer for that question.
How can I Borrow With DeFi?
- First, you need to choose a good DeFi lending platform like Aave, Compound, or others as per your wish. It’s essential to ensure that the platform supports the assets you want to borrow.
- Next, you need to connect your digital wallet to your DeFi lending platform. You can choose wallets like Metamask, Coinbase, or any wallet that you wish.
- After connecting the wallet, Now deposit a fund as a security deposit that is used as collateral for the crypto loan.
- After depositing collateral, select the crypto asset and the amount you want to borrow, and proceed with your loan.
Well, many of you are skeptical about the future of DeFi lending. So let’s see about them now.
Future of DeFi lending
The future of DeFi lending includes undercollateralized loans, cross-chain lending, and increased institutional adoption. So many people have shown interest in using DeFi platforms because DeFi lending gives additional benefits and avoids some pain points that were seen in traditional banking. And it gives easier access to lend and borrow funds without intermediaries.
DeFi is expected to be the future of banking, so many entrepreneurs want to use this opportunity, and they are willing to develop their own DeFi lending platforms due to the rapid growth of the DeFi space.
So let me tell you how entrepreneurs get profited by owning a DeFi lending platform.
How Profitable Entrepreneurs Can Be with a DeFi Lending Platform
- As a platform owner, you can charge a fee for every transaction that happens on your platform.
- Also, you can generate income through interest margins. So you can earn a percentage of the interest paid on loans, which comes from an average portion of the total interest charged to borrowers.
- Entrepreneurs can get profitable with liquidity pool fees. You can charge fees to users providing liquidity to the platform’s pools and, due to governance, incentivizing participation in the platform’s lending & borrowing activities.
- You can earn from the rising value of your platform’s own token. You can increase your holdings by staking tokens, providing liquidity, or participating in other platform activities.
Ok, at last everyone doubted how you can build a DeFi lending platform easily. So let me tell you how.
Hire Zodeak For DeFi Lending Platform Development
Entrepreneurs can easily build their DeFi lending platform with Zodeak’s help. As a leading DeFi development company, our experts help you to plan, design, develop, deploy, and maintain your platform. So you can step into this highly profitable DeFi business more quickly.