The growth of Decentralized Finance (DeFi) has been pretty interesting in 2020. The aim of the entire DeFi ecosystem is to provide a permissionless, transparent, and open-source financial ecosystem to the users. According to DeFi Pulse, the DeFi ecosystem locks in close to $13.01 billion and DeFi lending is the single largest segment of the ecosystem. On top of that, this segment has exhibited impressive growth in 2020.
What is DeFi Lending?
The process of offering and borrowing cryptocurrency assets in a permissionless and decentralized manner is known as DeFi lending. As the smart contracts automate transaction handling, the decentralized finance lendingplatform needs no middleman.
How Does DeFi Lending work?
A DeFi crypto lending platform requires users to deposit crypto assets to build a liquidity pool. While the users who add to the liquidity earn interest for being the liquidity providers, the borrowers can borrow the assets from the pool. All the terms of offering and borrowing of crypto assets are managed via self-managing smart contracts.
As a DeFi crypto lending platform is powered by blockchain, the operations remain transparent and immutable. On top of that, the lenders get an opportunity to earn high returns.
DeFi lending platforms require no centralized body to manage the lending and borrowing. Thus, they provide quick access to crypto loans to the end-users. Precisely speaking, the lending or borrowing of crypto assets is a three-step process. A user is required to start an account with the lending platform, add assets to the crypto wallet, and open smart contracts for lending or borrowing. As the process is automated, no user is preferred over others, which leads to the development of a democratic lending system where every user enjoys equal rights and opportunities.
When compared to the traditional lending market, DeFi lending is highly cost-efficient. In addition to that, it offers higher interest rates. According to DeFi Pulse, the current Interest Per Year (IPY) is $138.6 million.
A look at the DeFi Pulse also reveals that the DeFi lending market is dominated by 3 major players in the space. These platforms have an edge above other platforms and that defines their success. Here are the features that are most needed for the success of DeFi lending platforms:
The flash loan is a great feature for both borrowers and DeFi Lending platform owners. With this feature in place, the platform allows users to borrow loans without any collateral. However, this is a time-limited loan. If the borrower fails to repay the loan, it gets reversed automatically.
A platform that provides borrowers with an option to switch between stable and variable interest rates is catching the attention of DeFi users. This plays a very important role in crypto-asset lending because the markets are very volatile. By adjusting the interest rates, users can protect themselves against drastic market movements.
Some of the leading DeFi lending platforms offer no lower limit to lend and borrow.
DeFi territory is pretty complex for a non-trader. Thus, having a fiat gateway simplifies the experience for the users and increases the success rates of the platform.
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