Decentralized finance (DeFi) is a financial system set to revolutionize the traditional centralized finance system, which has been gaining popularity over the past few years. To date, there is more than US$66 billion worth of total value locked assets in this space. DeFi offers innovative financial solutions, including decentralized lending, which has the opportunity to change the way liquidity is in lending and borrowing fundamentally.
Decentralized lending is a DeFi product that aims to provide loans to businesses and individuals with no intermediaries. DeFi offers various types of decentralized lending, including DeFi lending protocols and decentralized lending platforms. DeFi lending protocols enable users to earn interest from lending their crypto assets, while decentralized lending platforms are an avenue for users to borrow crypto assets directly from another user.
Decentralized lending is slowly proliferating in the DeFi space, with a total value of locked assets worth more than US$33 billion. The increasing number of DeFi lending projects being introduced in the market means more users are utilizing this innovative financial service. Here’s why.
No more intermediaries
According to a study published in Review of Finance, “banks act as intermediaries for savers and borrowers. This creates a lengthy and tedious process for borrowers. Borrowers must fulfill the bank’s requirements which are often hard to acquire. For example, borrowers must have collateral to avail a loan or that they should have a certain amount of annual income to qualify for a loan.”
Decentralized lending can potentially offer a solution to these problems. By setting conditions and processes in smart contracts, decentralized lending can serve as intermediaries for both borrowers and lenders, removing tedious, lengthy processes. Apart from that, if a user wanted to lend or borrow in a particular condition, this innovation would allow that. Blockchain technology fuels DeFi lending, so the need for banks and other traditional loan organizations are eliminated. This makes decentralized lending automated, efficient, and, most of all, cost-effective for users.
DeFi lending promotes transparency
In traditional lending, your credit score or the bank’s internal system dictates whether your loan is approved or rejected. Unfortunately, there is little transparency in the process, and the structure of the evaluation is not entirely disclosed to the borrower. To those who are not familiar with the finance industry, most lending processes are opaque, leading to a lack of trust towards these institutions.
“In contrast, decentralized lending is inherently transparent. Decentralized lending platforms and protocols are made based on smart contracts. The algorithms used for every transaction are stored and processed openly, easily accessible in the blockchain network. Since it’s in a public distributed ledger, anyone can view them to verify the mathematical calculations for interest rate, mortgage amount, and other values.” shares Chandresh Ahawar, CEO and co-founder of UniLend Finance, a permission-less decentralized DeFi protocol.
Transparency in every transaction can lead to more trust in DeFi products, specifically decentralized lending, which can significantly contribute to the increasing adoption of this service.
DeFi lending benefits all parties involved
Apart from the benefits DeFi lending provides to its borrowers and lenders, various DeFi projects also incentivize developers who build on lending protocols. For example, UniLend Finance, a revolutionary DeFi platform that is bringing you permissionless, gas-efficient, multi-chain flash loans—is catapulting its platform forward into a new phase of growth with a $1 million ecosystem grant program to accelerate adoption.
The company wants to expedite the adoption of its protocol by incentivizing developers to come and build on their platform, and that’s what the $1 million grant is designed to do. The UniLend team hopes that this grant will incentivize developers to formulate new use cases for their gas-efficient loan products and discover unknown functionality for their lending and borrowing features. The team also is hoping that developers will find innovative ways to integrate liquidity in the platform, as well as allow UniLend to further expand into additional ecosystems. Most importantly, the team is looking forward to seeing developers create new use cases for its overarching infrastructure.
DeFi lending is available anywhere in the world
Applying for a bank loan usually requires an individual to visit the bank personally. Requirements to qualify for a loan include a permanent residency and official documents from the bank’s country. Additionally, the borrower must have enough credit score to get approved for a loan.
DeFi lending does not require any of the following. Anyone can apply for a loan, anywhere in the world as long as they have access to an internet connection. It doesn’t matter who you are, what you do for a living, or where you live, as long as you can deposit the needed collateral. This makes decentralized lending more accessible than banks, especially for businesses that need extra cash flow from developing countries.
Conclusion
According to a study published in Cornell University “Decentralized lending has a lot of potential to solve various challenges in the traditional financial system. Because of this, more and more DeFi lending platforms are being introduced in the market. At the same time, users are now familiar with the advantages and opportunities it offers, making it one of the hottest DeFi products to watch out for. DeFi users can now earn interest through DeFi lending, which increases their ways of profiting in the DeFi space.”
Decentralized lending has many advantages over bank-based lending, all of which result in increased trust and accessibility. This is why DeFi lending has the potential to become the next big thing in the DeFi space, especially when consumers realize that they are more attractive than traditional financial institutions.
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