Decentralization and Automation
DeFi lending platforms are fully decentralized and transactions are processed by code, not by humans. In such services, smart contracts use algorithms and protocols to automate the entire process, making lending and borrowing more efficient and scalable.
Transparency and Accessibility
Anyone can access DeFi lending platforms which makes them completely transparent as nothing can be hidden on the blockchain. Unlike centralized finance platforms, there are no intermediaries or financial regulators, which means that the user does not need to go through an identity verification process. Crypto loans are issued to anyone who can provide collateral or return funds in the form of an instant loan. Due to this quality, they are easier to obtain than a loan from a traditional financial institution and there is no need for a credit check.
Getting a loan on DeFi lending platforms is instant. Thanks to smart contracts, all users are required to do is apply for a loan and then send the cryptocurrency they want to use as collateral to a specified wallet.
Broad Opportunities for Borrowers
Users of decentralized lending platforms can apply for loans of any size without having to verify their identity to a third party. Loans can be in stablecoins, fiat currencies or cryptocurrencies.
Cyber Security Risks
DeFi projects regularly use bug bounties and invoke open source principles (such as using boilerplate and technical standards like ERC-20) to mitigate cybersecurity risks.
Oracles are providers of information from outside the chain that smart contracts need. Their activity is a critical aspect of how many protocols work, including those that rely on oracles to provide the current value of assets held as collateral. There may be risks when using oracles. Thus, centralized oracles are vulnerable to malicious behavior by the provider of information (for example, about the dollar exchange rate), as well as errors in coding, attacks or manipulation by others.
Risks from Third Parties
The normal functioning of DeFi protocols requires the participation of external participants (validators, arbitrage traders, liquidity providers, oracles). There are mechanisms to encourage such participation through tokenomics, arbitrage opportunities, as well as commissions and other profit mechanisms. All of this is designed to counter the risk that these third parties may be incapacitated.
DeFi (decentralized finance) is a trend in the cryptocurrency industry, consisting of a set of specific applications, services, tokens and smart contracts that work on the blockchain. All these services are combined into one single indivisible blockchain ecosystem that offers different services to users. Many of these services are very similar to those provided by classical banks.
Essentially, DeFi is a distributed (decentralized) alternative to the banking system. Usually, the services of the DeFi sector are used by people who, for their own reasons, do not want to get involved with the classical banking system. In turn, DeFi can completely replace classic banking services, while making them safer, more anonymous and without the risk of being deceived by banking institutions. In DeFi, you can also find: fast transfers, loans, lending, deposits with annual interest.
The DeFi sector solves many problems of the modern world of finance and allows you to:
Increase access to monetary instruments in countries with a poorly developed banking sector;
Create a truly decentralized and distributed asset market, where the price of goods will not be created at the whim of the state or company leaders;
Get income from investments in cryptocurrency;
Reduce commissions for lending, deposits, transactions.
Lending is a way of credit provision in the world of decentralized finance, where the user has the opportunity to deposit their funds and receive interest from them or, conversely, open a loan secured by their own funds.
You can act as both a lender and a borrower. In the first case, you provide your funds, which are sent to the smart contract of the lending platform. These funds will be issued to other users on credit. From them they will pay small interest, which will be sent to you for the fact that you have provided a loan. Everything happens one-on-one like in the banking system, except that there is no intermediary in the form of a bank: everything happens directly, decentralized.
You also have the option to borrow a certain amount. However, here the principle of operation of the system is fundamentally different from banking analogues. To get a loan, you must invest your money. For example, you need to invest in ETHr, then the platform will give you the equivalent amount in USDT, and your ETH will be frozen in a smart contract. To return it, you just need to deposit borrowed USDT back into the platform account plus a small percentage for opening a deposit. Thus, lending allows you to almost double your capital.
The credit market is an important source of resources for any industry. For participants in the cryptocurrency business – exchanges, funds, ICO/IEO projects, providers of bitcoin ATMs and exchange services – access to low-cost loans secured by the asset prevailing on the balance sheet allows you to expand your money management options.
Decentralized lending protocols not only minimize counterparty risk, but also provide transparent access to borrowed funds 24/7.
Crypto lending is a rapidly growing and developing area. It is becoming a popular alternative to bureaucratized traditional finance, where the yield of instruments is falling amid extremely low interest rates.
DeFi gives finance flexibility and the ability to earn a small percentage in a bear market, as well as borrow funds at an acceptable rate of interest. In addition, decentralized markets for synthetic assets are steadily developing, opening up new opportunities for traders.
The advantages of DeFi over the traditional banking system with expensive loans and low-yielding deposits are undeniable. This means that there is a considerable potential for market growth.