Defi Lending: How It Works and How It Disrupts the Lending Market

With blockchain establishing its position in the software development industry, Decentralized Finance (or Defi) has revolutionized the cryptocurrency industry by providing a faster and more secure environment for conducting finance and commerce operations. With a record value of $2.6 trillion, the crypto market has proved that it is a force to be reckoned with. The Defi trend has experienced sustained growth and even doubled its market share between April 2020 and March 2021, according to Statista. 

Today, we’re going to discuss Defi lending and its role in the commerce market. Let’s start with the definition. 

What Is Defi?

Decentralized Finance (Defi) is an ecosystem of financial apps developed using blockchain technology that can be used without any third-party integrations. Thanks to P2P networks, Defi allows for connecting and managing assets regardless of their location and status.

The main goal of Defi is to provide an open-source and transparent environment for financial operations. Smart contracts serve as the basis for decentralized finance technologies since they are self-executing and don’t require intermediaries. 

What is Defi Lending?

Defi lending provides a trustless environment for establishing crypto loans without intermediaries and allows for listing crypto coins for lending purposes. In other words, a borrower can take advantage of P2P lending by taking a loan through a decentralized platform. Unlike the traditional banking system, Defi doesn’t require time-consuming and onerous checks on a customer’s credit.  

The lending protocol also allows lenders to earn interest while lending crypto coins to borrowers. When compared with other decentralized apps, Defi features the highest lending growth rate. 

In a traditional banking system, people set up a savings account and earn an interest rate based on the balance of their savings account. With Defi platforms, crypto investors can lock their funds and receive interest. 

How Does Defi Lending Work?

A Defi platform can operate the entire lending process from start to the finish without intermediaries. The borrower only needs to make a deposit on a lending platform via smart contacts. The deposit needs to be associated with a particular currency and match the amount of the loan. 

A lender can be any crypto investor. Next, the algorithm can match borrowers with lenders who meet the needs of their loan request. Then, the borrower only has to agree to the lender’s terms to receive their loan. The loan transaction is secured and verified in the blockchain. Then, the lender can start collecting payments based on the agreed-upon terms. All the transactions are recorded in the blockchain. No one can change the terms of a loan amount without being noticed. 

Defi offers many of the same services as brick-and-mortar banks such as lending, borrowing, investing, and trading but with extra benefits. 

Benefits of Defi Lending 

Fast processing speed 

The most significant benefit of digitalized lending processes is their fast loan origination speed. Defi lending platforms are powered by cloud-based services, machine learning algorithms, and advanced analytics for fraud detection (to minimize risks and automate lending processes). Many new platforms are combining these technologies to significantly speed up the entire process. 

Improved consistency 

Within Defi lending platforms, it is not possible for variations to occur when evaluating applicant attributes. They also feature clearly outlined rules for credit policies that help introduce consistency during the lending process. 

Full compliance

The rules for lending are secured in the blockchain and provide a record of who, where, and when certain rules are applied and which rules are in force. Full compliance serves as evidence to ensure that a lender complies with local, state, and federal laws and regulations before they are allowed to issue a loan. 

Greater transparency

Since every transaction is secured in the blockchain and verified by every user, there is no possibility of frauds or scams. This level of transparency allows for rich data analysis and makes every transaction visible to verified users. 

Enhanced flexibility

Defi utilizes smart contracts. In turn, smart contracts are highly programmable and can be used for developing new financial instruments and digital assets. 

Open to public

Defi lending offers permissionless and open access. Anyone with a crypto wallet can access Defi platforms built on blockchain despite their geographical location and amount of funds.

Improved portfolio profitability 

Lenders and borrowers can ride the crests of volatility and get the most out of the digital lending process thanks to built-in analytics tools. Understanding seasonal demands and monitoring loan applications helps lenders anticipate and allocate proper resources. Moreover, lenders can obtain information about credit tiers, demographics, loan sources, and others. By taking all this data into account, a lender can make well-informed decisions.

No intermediaries

While the traditional banking system is based on numerous interactions with different financial institutions, Defi lending platforms don’t require any mediators. The transaction and rules secured in the blockchain determine the resolution for any possible dispute. Since there are no intermediaries, the costs of going through the lending process are significantly lower than traditional methods via a bank or other financial institution. 

How Defi Lending Platforms Can Help the Financial Sector 

There are three key areas where Defi lending can come in handy – lending and borrowing, asset management, and savings. 

Lending and borrowing

Defi lending platforms are mostly used for simplifying peer-to-peer lending and borrowing procedures. They can help omit intermediaries and speed up every process involved in securing a loan. 

Asset management 

Crypto wallets like Metamask, Argent, and Gnosis Safe coupled with Defi lending protocols allow users to retain full control over their crypto assets. They help users interact with other decentralized apps as well as buy, sell, and transfer crypto, and even earn interest on investments. 

Savings 

Defi lending platforms offer new, innovative ways for managing crypto savings. Users can take advantage of several lending platforms and maximize their earnings. Interest-based accounts can help users increase their earnings and grow their investments exponentially. 

In a Nutshell 

Defi lending platforms revolutionize the process of lending and borrowing. They can help create a more open and transparent financial system, reduce the costs of doing business, and speed up the decision-making process. That is why Defi continues to disrupt the financial system as a whole. 

If you’re looking for an experienced blockchain development company to develop a Defi lending app from scratch, we can help you. Contact us to discuss your app idea and turn it into a full-scale software solution.