Decentralized Finance (DeFi) is an ecosystem of financial applications based on blockchain technology that operates without any third-party or central administration intervention.
It uses a P2P network to establish decentralized applications that would enable everyone to connect and manage their assets regardless of their status and location.
Smart contracts are the foundation layer for Decentralized Finance as they are self-executing and do not require intermediary oversight.
DeFi lending platforms aim to offer crypto loans in a trustless manner, i.e. without intermediaries, and allow users to enlist their crypto coins on the platform for lending purposes.
A borrower can directly take a loan through the decentralized platform known as P2P lending. Some of the most established lending protocols inlcude:
Besides, DeFi lending protocols allow the lender to earn interest. Among all of the decentralized applications (DApps), DeFi has the highest lending growth rate and is the most prevalent contributor for locking crypto assets.
What are the Benefits that DeFi Lending Provides to its Users?
1.) Improved Origination Speed
Digitally-enabled lending processes have fast processing speed.
DeFi lending platforms are backed by cloud-based services and analytics for fraud identification and detection, and machine learning calculations for optimum loan terms and risk factors. All these technologies eventually help to speed up the process.
As soon as the loan is approved, lenders send offers via e-contracts.
2.) Better Consistency in Lending Decisions
Rules describing credit policies guarantee consistency in lending decisions. Variations in evaluating applicant attributes and structuring deals by underwriters are eliminated.
Whats more, the rules are encoded in smart contracts and can be updated as needs require. This guarantees more effective decision making compared to Traditional Finance (TradFi).
3.) Compliance with Local and National Laws
One of the main concerns about crypto and DeFi is whether they are compliant with laws and regulations that have been set up to, among other things, protect consumers.
Regulation may still be catching up in many jurisdictions, but many more countries are now unveiling rules to govern crypto assets activities, including in areas like:
- South Africa
While that sort of regulation continues to be drafted and unveiled, DeFi, thanks to smart contracts and blockchains’ characteristics, enables self regulation that can cater to all parties’ interests.
Decision rules provide a record of who, when, and where the rules were used and which rules were in effect. It plays the role of evidence and ensures that the lender complies with federal, state, and local regulations.
4.) Better Analytics Coverage to Improve Performance
Analytics can help lenders and borrowers get the most out of the digital lending process.
Monitoring loan applications over a particular duration (a week, month, or year) can help lenders anticipate and allocate proper resources to accommodate seasonal demands.
Analytics also provide insights into several areas that can use improvements, including:
- Loan sources
- Credit tiers
The portfolio can be improved by determining how borrower characteristics and credit policies affect loan performance.
5.) Blockchain Native Qualities
Having mentioned blockchain’s qualities above, it is only fair to outline them. After all, these will represent some of the attributes and values that truly set DeFi applications apart:
- Permissionless: DeFi lending allows open, permissionless access, meaning anyone with a crypto wallet can access DeFi applications built on blockchain, regardless of their geographical location and without any minimum amount of funds required
- Transparency: The public blockchain broadcasts every transaction on the network and is verified by every user on the network. This transparency level around transactions allows for rich data analysis and ensures verified access to every user on the network
- Immutability: Blockchain’s decentralized architecture ensures tamper-proof data coordination and increases security and the ability to be easily audited by concerned parties
- Programmability: Smart contracts are highly programmable, automate execution, and enable the development of new digital assets and financial instruments
- Interoperability: The use of an interconnected software stack ensures that DeFi protocols and applications integrate and complement one another
Finally, blockchain technology provides users with the opportunity to store their own funds, often called self custody.
While users can have their funds held by institutions, anyone can similarly create a wallet on the blockchain and get a private key and public key. Thus, why not custody your own funds?
Users can even turn to Web3 wallets (the likes of MetaMask) and this ensures that DeFi market participants keep strong custody of their assets and control their data.
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