How does DEFI LENDING Work?

How does DEFI LENDING Work?

Since organizations began to experiment with Blockchain's potential, the finance sector also has emphasized the need to develop Blockchain-based fintech solutions. Since it covers almost all financial services, from online payment to storage and trading in cryptocurrency, Blockchain is set to revolutionize the traditional financial system. The emergence of Defi (Decentralized Finance), Blockchain has grown to become more robust.

With a lot of excitement already on this market defi lending is still moving forward and has racked up an impressive amount of capital within a short period of. According to Defi-Pulse's data the Total Value locked (TVL) of Defi protocols is $20.46 billion at present, an increase from just $1 billion in the year prior. The key point in this article is the fact that Defi has grown by more than 20 times in just one year, indicating how popular Defi has received.

What exactly is Defi?

In simplest terms the term "decentralized finance" refers to an application ecosystem built in Blockchain technology that is operated without any central or third-party administration intervention. It makes use of an P2P network to create decentralized applications that allow anyone to connect to manage assets regardless of state of affairs and their location. It's goal is to create an open source, transparent and completely permissionless financial services environment.

Smart contracts form the basis base for decentralized finance since they operate themselves and don't require an intermediary to oversee.

What is the definition of Defi loan?

The Defi lending platforms are designed to provide crypto-based loans in a secure manner, i.e., without intermediaries, and let users register their crypto currency through the platform to lend them. Borrowers can take loans via the decentralized platform , known as P2P lending. Additionally, the lending process permits the lender to earn interest. In comparison to all the Decentralized Applications (DApps), Defi has the highest growth rate in lending and is the biggest participant in locking crypto assets.

Defi Lending vs. Traditional Lending

  • The base technology behind the defi loan involves Blockchain; 
  • Defi utilizes all its distinctive features and performs superiorly in comparison with traditional loans.
  • Defi lending is transparent and easier access to assets in each money transfer without the use of any third party.
  • It offers the most simple borrowing process. The borrower must create an account with the Defi platform, set up an account with a cryptocurrency wallet, and then open Smart contracts. 
  • The Defi platform is censorship-free which means there is no preferred treatment, while still making sure that the system is immutable.
  • Defi lending can benefit both borrowers and lenders. It also offers margin trading and allows investors with long-term plans to lend their assets to get higher rates of interest. 
  • Users will also be able to get access to credit in fiat currency to get loans at less rates than exchanges that are decentralized. 
  • Additionally, users are able to sell their cryptocurrency through a central exchange for cryptocurrency, and later loan it out to decentralized exchanges.s

How do you define flash loans?

One of the latest innovations in the defi loans area is the flash loan e.g. that are offered through Aave. Aave protocol. It opens the way to all sorts of transactions that were previously limited because of frictions in the traditional finance sector. In short flash loans are able to be repaid without collateral. They are then borrowed and then repaid through one blockchain-based transaction.

Conclusion 

Another similar scenario is the collateral swapping process whereby an individual who has taken out a loan at Compound using ETH for collateral using an instant loan, is able to repay the loan, take out the ETH and then exchange the ETH to BAL via Uniswap and then take the loan back at Compound however this time using BAL as collateral deposited. In this case, it is clear that the borrowing at Compound is basically the same, but it was just refinancing with BAL as collateral, instead of ETH.

Click here for more information: https://www.leewayhertz.com/how-defi-lending-works/



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