Due to its inherently trustless operation and easy access to capital, the world of decentralized financial (DeFi), is slowly expanding to include a large portion of global financial lending. New products and services have been created thanks to the burgeoning innovation in Blockchain technology.
With the advent of DeFi, lending and borrowing have been an integral part the crypto ecosystem. Borrowing and lending are core services of traditional financial systems. Most people are familiar with these terms, such as student loans and mortgages.
Traditional borrowing and lending involves a lender providing a loan to a borrower, earning interest in return for taking on the risk, and the borrower providing collateral assets like real estate or jewelry to secure the loan. Banks facilitate such transactions in traditional financial systems. They conduct background checks, such as Know Your Customer, to reduce the risk of granting a loan.
Related: Liquidity is what has driven DeFi’s growth up to now, so what’s the future outlook for DeFi?
Borrowing, lending, and blockchain
The blockchain ecosystem allows lending and borrowing to be done in a decentralized way. Parties involved in transactions can deal directly with one another without the need for intermediaries or financial institutions through smart contracts. Smart contracts are computer codes that execute themselves and have the rules for a transaction embedded (coded). These rules, also known as loan terms, can be fixed interest rates, loan amount, contract expiry date, and are executed automatically when certain conditions are met.
In exchange for other assets, loans can be obtained by using crypto assets as collateral. Deposit your coins in a DeFi protocol smartcontract and you can become a lender. They are then issued native tokens, such as Dai for MakerDao, aTokens, and cTokens. These tokens represent the principal amount and interest that can be redeemed in the future. In exchange for crypto assets, borrowers provide collateral to secure loans from DeFi protocols. The loans are usually over-collateralized to cover unexpected expenses and the risks associated with decentralized finance.
Related: Are you looking to get a crypto loan? Here are the facts
Total value locked, borrowing, and lending
You can borrow and lend through many platforms in the decentralized universe, but it is possible to determine the performance of a protocol by looking at its total value locked (TVL). TVL is a measure that measures the assets staked into smart contracts. It is used to assess the adoption rate of DeFi protocols. The higher the TVL, then the protocol is more secure.
Smart contract platforms are a key part of the crypto ecosystem. They make it easier to borrow or lend because of their efficiency in terms of lower transaction costs, faster execution speeds and quicker settlement times. Ethereum is the dominant smart contract platform. It is also the first blockchain that introduced smart contracts. DeFi protocols’ TVL has increased by more than 1,000%, from $18 billion in Jan 2021 to $110 billion in May 2022.
According to DefiLlama, Ethereum accounts for more than half of the TVL worth $114 billion. Due to its first-mover advantage, many DeFi lending and borrowing programs are built on top Ethereum. Other blockchains like Terra, Solana, and Near Protocol have gained more traction than Ethereum due to their lower fees, higher scaling, and greater interoperability.
Aave and Compound, two of the most popular Ethereum DeFi platforms, are both DeFi lending platforms. Anchor, which is built on Terra blockchain, is one protocol that has seen significant growth in the last year. Below is the graph showing the top DeFi lending protocols that are based on TVL.
DeFi platforms offer transparency that is unparalleled by traditional financial institutions. They also allow for permissionless access which means that anyone with a crypto wallet has access to services from anywhere in the world.
However, there is a lot of potential growth in the DeFi lending market. The use of Web3 crypto wallets also ensures that DeFi participants have full control over their assets.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
CoinDCX is an Indian cryptocurrency exchange founded by Neeraj Khandelwal. Neeraj believes crypto and blockchain can revolutionize traditional finance. He wants to create products that make crypto easy and accessible for all. His expertise lies in the crypto macro area, but he is also keenly aware of global crypto developments like CBDCs, DeFi, and others. The prestigious Indian Institute of Technology Bombay awarded Neeraj a degree as an electrical engineer.
Eileen Wilson –Technology and Energy
My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.