Decentralized Finance is one of the by-products of Distributed Ledger Technology (DLT) that has quickly gained endorsement in this tech world. Over time, DeFi lending and DeFi borrowing have started to get the likes of the general public. The idea of borrowing and loaning money to others using computer code without relying on banks or other so-called “trusted mediators” has become so common.
Before that, we have to know the reason behind this obsession with DeFi applications.
How Come DeFi Got The Limelight?
Meanwhile, DeFi has paved the way for numerous creative projects that mimic traditional banking operations, with the only exception that every process will happen in a completely decentralized way this time. If you still doubt the DeFi rise, you must know that approximately $20 Billion is presently sealed in DeFi protocols.
You will need Decentralized Finance (DeFi) development services to create a successful DeFi product. We will discuss the nooks and corners of DeFi lending and DeFi borrowing elaborately.
Conventional Lending VS DeFi Lending
DeFi does not depend on third parties, similar to what we have in traditional lending. Instead, it facilitates peer-to-peer lending, which speeds up the loan application process with complete openness among network participants. For example, Bitcoin gives considerably good interest than banks. That is why we say that DeFi lending and borrowing is worth the time and curiosity.
Now, let us move into the working procedure of DeFi lending and DeFi borrowing.
How Does DeFi Borrowing And DeFi Lending Work?
Firstly, why not make things simple to understand? The working of DeFi lending is similar to conventional lending. The only difference is that we use P2P decentralized apps (Dapps) here.
In traditional banks, people create savings accounts to deposit cash and earn interest. In DeFi, investors will secure their assets to assure liquidity and generate profits.
Generally, a decentralized platform will not have any central authority to create and maintain liquidity. So, it will earn profits by allowing investors to maintain liquidity using their funds. These platforms will provide direct loans to borrowers with no middlemen intervention. However, it is feasible only when you employ good decentralized finance (DeFi) development services from a professional.
A borrower has to match the loan value via a smart contract deposit with a specific cryptocurrency. This type of deposit can be used with multiple cryptos and acts as collateral.
What Can You Use As A Collateral?
Imagine keeping your home as collateral in banks. If you stop paying the loan, authorities will seize your house. On the other hand, DeFi will demand collateral worth more than the loan balance. It can be cash, crypto, digital tokens, or anything else having a value equivalent to the loan amount. This shows that there are no defined qualifications mandated to become a lender.
Many enterprises have earned a considerably high capital using DeFi, intensifying its popularity even more. Thus, the service provider you seek help from must have excellent domain knowledge. If not, users will not be interested in your DeFi platform. The choice is yours!