DeFi is changing lending routes on the blockchain
Smart contracts provide decentralized lending and borrowing methods, allowing DeFi to finally dethrone the old finance sector.
The realm of decentralized finance (DeFi) is gradually spreading to encompass a large share of the global financial lending sector because of its inherent trustlessness and ease of acquiring currency. The crypto ecosystem has grown to a $2 trillion market capitalization. Thanks to burgeoning innovation in blockchain technology, new products and services have emerged.
Lending and borrowing have become a key part of the crypto economy since the advent of DeFi. The old financial system’s major services were lending and borrowing, and most people are familiar with terms like mortgages and student loans.
A lender gives a borrower a loan and earns interest in exchange for taking the risk, while the borrower provides collateral in the form of real estate, jewelry, and other assets in traditional borrowing and lending. Financial institutions such as banks facilitate transactions in the traditional financial system by conducting background checks such as KYC and credit scores before approving a loan.
Liquidity has propelled DeFi’s growth, but what does the future hold for the company?
Borrowing, lending, and blockchain
In the blockchain ecosystem, lending and borrowing activities can be carried out in a decentralized manner, where the parties involved can deal directly with each other without the use of an intermediary or a financial institution via smart contracts. Smart contracts are self-executing computer codes that have a specific logic and are coupled with transaction regulations (programmed). Fixed interest rates, loan amounts, and contract expiration dates are all instances of regulations or loan terms that be carried out automatically when certain criteria are met.
Decentralized finance #DeFi provides a clear description for an emerging ecosystem of blockchain-based alternative financial systems. DeFi platforms help users in engaging in different traditional financial transactions such as lending and borrowing through direct #P2P exchanges.
— Tom (@Tomheroy_io) May 10, 2022
On a DeFi network, loans are obtained by exchanging crypto assets for other assets as collateral. Users can become lenders by placing their currencies into a DeFi protocol smart contract. In exchange, they receive native protocol tokens like cTokens for Compound, aTokens for Have, and Dai for MakerDao, to name a few. These tokens represent both the principal and the interest that can be redeemed later. Borrowers exchange crypto assets for other crypto assets they intend to use as collateral while borrowing from one of the DeFi protocols. The loans are typically over-collateralized to account for unanticipated expenses and risks associated with decentralized financing.
Borrowing, lending, and total value locked
One can lend and borrow in the decentralized world through a variety of platforms, but one method of evaluating a protocol’s performance and selecting the best one is to look at the total value locked (TVL) on such platforms. The TVL is a metric for assessing DeFi protocol adoption since the greater the TVL, the more secure the protocol becomes.
Smart contract platforms have become a key element of the crypto ecosystem, making it easier to borrow and lend, thanks to the savings provided in the form of lower transaction fees, faster execution, and shorter settlement time. The most popular smart contract platform is Ethereum, which was also the first blockchain to include smart contracts. The TVL in DeFi protocols has expanded by over 1,000%, from $18 billion in January 2021 to over $110 billion in May 2022.
What does the future hold for DeFi on the major #Layer1 chains and protocols? My thoughts in 10 tweets. 1/10
— ALΞX (@CrossChainAlex) May 15, 2022
Ethereum accounts for more than half of the TVL, or $114 billion, according to DefiLlama. Due to the first-mover advantage, several DeFi lending and borrowing mechanisms are being developed on Ethereum. Other blockchains have gained interest as a result of advantages over Ethereum, such as lower costs, greater scalability, and greater interoperability.
Also, read – UniLend, the Platform Changing the Defi Community
Two Ethereum DeFi protocols, Aave and Compound, are two of the most popular DeFi lending services. However, Anchor, built on the Terra blockchain, has witnessed significant development in the previous year. Based on TVL, the graph below depicts the top DeFi lending protocols.
DeFi platforms enable unparalleled transparency and permissionless access, allowing anyone with a crypto wallet to use services from anywhere on the planet.
Despite this, the DeFi loan market has a lot of room for growth, and the use of Web3 crypto wallets ensures that DeFi participants preserve their assets and have complete control over their data, thanks to the cryptographic security provided by blockchain architecture.