Defi Lending – How Does It Work?

November 11, 2020

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DeFi, or decentralized finance, is the new buzzword in the crypto world. Over the last two years, the term has revolutionized borrowing and lending, among other things.

As long as you have an internet connection, you can borrow or lend, provided you play by the rules. DeFi has kicked out the bumps put in place by traditional financial institutions including third parties and everlasting checks.

What is DeFi lending

DeFi is the term that describes the act of borrowing or lending over the crypto network. Technically, this lending space is similar to a traditional institution offering financial loans to people and businesses. The only difference is that DeFi does that without intermediaries. As a blockchain user, you can turn over your coins to a specific lending platform that can be given to another user on interest. What govern DeFi lending are smart contracts. Basically, when you lend or borrow, you enter into an agreement with the other party and sign a contract with them that shows all the details, such as the repayment period, interest rate and other details.

In comparison to traditional lending, DeFi offers amazing benefits. The biggest one is the transparency of the entire process, thanks to the absence of a third party. It is also fairly simple and straightforward to borrow or lend. As long as you have an account on one DeFi platform and a crypto wallet, you are good to go. Opening smart contracts and verifying everything takes a few minutes. Additionally, the DeFi lending platform offers no special treatment to anyone.

How does it work

For a while now, the Defi lending space was built around the Ethereum blockchain. However, Bitcoin recently entered the space, but Ethereum still has over 15 DeFi lending platforms. Basically, when a borrower decides to take a loan in blockchain, the network will request them to add a value in a currency that is equal to or higher than what they are borrowing. This is what is referred to as collateral and it can bear different currencies. Most crypto platforms allow the adding of funds via bank transfer, Apple Pay, or card. You can also send Ethereum or Bitcoin directly from your wallet.

Once you have some coins in your wallet, you will need to enter into an agreement via the smart contract and process your loan. After the period of repayment is over, pay back the principal and interest to get back your principal coin. Well, that’s the simple of it. There are several DeFi lending platforms and each one has its own rules. The most common one, Compound, lets borrowers and lenders have a straight interaction and receive a floating interest rate. The others include Maker, Aave, and Nuo Network.

DeFi lending is certainly among the most amazing things that have happened in the crypto world. The rate of investment is awesome. The lending or borrowing process is transparent, simple and fair. All you need to do is simply open an account, buy some coins and sign a smart contract to lend or borrow.

Bill Adams

Bill Adams has been into currency trading for over five years. After taking a short course about Forex and cryptocurrency, he decided to put his knowledge to good use as a writer and trader at TenkoFX. His educational background in business administration and economics has given him a broad base from which to approach Forex and cryptocurrency topics.

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