What are DeFi loans – How does DeFi lending work?

What are DeFi loans – How does DeFi lending work?

By Gaurav Arora

Decentralized finance (DeFi) is a movement that is used to leverage the decentralized networks such that the old financial products are transformed into transparent protocols that can run without any middlemen. The main purpose that blockchain and the crypto space are catering towards  reducing third-party involvement in any transaction that takes place. Providing financial freedom is what the blockchain protocols have been collectively working towards, popularly known as DeFi or Decentralized Finance. DeFi consists of peer-to-peer protocols that are developed on this decentralized network for easy trading, borrowing, and lending of financial tools.  DeFi Lending is usually a platform based on where investors can get access to loans without any intermediaries. Not only do they have a process set for loans without any third-party involvement, but also have the option to enlist their crypto tokens for lending purposes! 

Using the P2P method of lending, a borrower can directly take a loan from the decentralized platform. Amongst the various decentralized applications, often called DApps, available; DeFi has the steadiest growth rate in lending.

Crypto assets in your wallet do not generate an income  if not put to use. Though the underlying value of the assets may increase or decrease, just holding particular crypto will not lead to any earnings. This is where DeFi loans come into play. DeFi loan is a method that enables users to lend their crypto as a loan while earning interest on the loan. Unlike in traditional finance, anyone in the DeFi realm can become a lender. All you need is a certain amount of any crypto token and a borrower looking to take out a loan.The easiest way to do this is via lending pools.

Though DeFi lending is based on blockchain technology, it also brings certain challenges that help smoothen the loaning process

  • The loans granted within DeFi are consistent. All the rules are already set which leaves little to no room for human error.
  • As the underlying technology behind DeFi is blockchain, it provides absolute transparency to all transactions taking place while a loan is granted.
  • Quick execution of loans as there is no delay due to credit checks, which is usually the case for traditional loans.

Overall, however, the DeFi Lending marketplaces have seen steady growth in the crypto ecosystem with a rise in many new innovative platforms.  There are some top entries among the best DeFi loans which are aligned to the protocols and provide a  decentralized liquidity market platform that is non-custodial in nature. Using these app the users could participate in the protocol as borrowers or depositors. 

The DeFi Lending marketplaces have seen steady growth in the crypto ecosystem with a rise in many new innovative platforms. The deep dive into DeFi loans and DeFi lending has clearly stated the potential this sector has in reshaping the financial system. The decentralized nature of the function makes DeFi Loans that much more appealing and its handshake with the blockchain technology makes it an attractive option for individuals to explore. Being deeply involved with crypto, DeFi Loans also require a thorough understanding and research before they are explored.

The author is senior vice-president, CoinDCX

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