What Is DeFi (Decentralized Finance) and Its Lending Platforms (2024)

The rise of DeFi has made it more likely that blockchain will be used to make financial apps. DeFi, which stands for “Decentralized Finance”, has been getting much attention lately because it has helped businesses get a lot of money.

You might be surprised that almost $20.46 billion is locked up in DeFi protocols. This shows that the use of DeFi applications has grown significantly. This has made this type of lending grow. One part of the cryptocurrency ecosystem that is growing is DeFi lending. With these types of loans, crypto holders can now lend their assets and earn a lot of interest.

In simple terms, DeFi lending is about giving crypto loans on a platform that one person doesn’t control. DeFi has the highest growth rate for lending out of all the Decentralized Applications (dApps) worldwide. It is one of the most common ways that crypto assets are locked.

DeFi is an umbrella term for moving existing financial products, like loans, to the blockchain. The idea is to use existing cryptocurrencies and smart contracts to offer financial services.

You can see how much money is locked up in these projects by taking a quick look at DeFi Pulse. At the time of writing, these projects have more than $9 billion locked in. This is up from just over $1 billion earlier in 2020.

Maker and AAVE are the two biggest lenders right now. (Read more about Decentralized Finance: What is it and How Does it Work?)

The potential for blockchain and cryptocurrencies to democratize access to financial industry tools is one of its most attractive features. DeFi, which stands for “decentralized finance”, is an umbrella term for this change in how money is made, spent, and sent.

Crypto assets are like traditional banks because they offer the same services but are not based in one place. This includes lending, borrowing, trading in the spot market, and trading with a margin.

With DeFi loans, anyone can get a loan quickly and easily without ever having to tell a third party who they are or go through the checks that traditional banks do. But there are also bad things.

We’ll talk about how a DeFi loan works, what makes it better than traditional ways of getting money, and what the future may hold for this new technology.

Crypto assets don’t earn interest while they’re in a wallet. The underlying asset’s value may go up or down, but holding that particular cryptocurrency doesn’t make you anything. DeFi loans can help with this.

Consider the possibility of lending your cryptocurrency out and receiving interest payments in return. This is how banks function, but only a select few have access to them. Anyone can rise to the top in DeFi.

Lending your cryptocurrency to others is a great way to make extra money. There are many ways to do this, but lending pools are the most common. These are what a traditional bank’s loan offices look like.

Since June 2022, the market value of DeFi has fallen to less than 80 billion US dollars. The crash for Terra (LUNA) and its stablecoin Terra USD (UST) on May 22, when coins such as USDD lost their peg to the US dollar, had a significant impact on the DeFi market.

A declining crypto market has also impacted the DeFi lending process. As a result, the DeFi market is less trustworthy and as large as traditional financial systems. As a result, putting your trust in a sector with liquidity concerns can take time and effort.

DeFi provides the same products as traditional financial institutions (lending, borrowing, trading, investing, and so on) but with added benefits:

DeFi is decentralized and anonymous. Therefore, you can earn interest by lending your crypto assets to others. Lending pools are the most common way to make interest in crypto-assets.

Borrowers are typically required to over-collateralize their loans to protect themselves against sudden drops in collateral value, which would result in penalties, making it a safer option for lenders.

Using a smart contract, which can be found on projects like Ethereum, users can pool their assets and distribute them to borrowers with the loan terms written into the contract.

These loan pools each have their method of distributing interest to investors, so it’s worth your time to research the type of pool you’d like to be a part of as an investor. The same advice applies to borrowers, as each collection will approach borrowing from their assets and the lending rules differently.

When borrowers go to a bank to get a loan, they need collateral. For example, the collateral for a car loan is the car itself. The bank will repossess your vehicle if you fail to make your loan payments. That makes sense. However, because a decentralized system is A) anonymous and B) lacks physical property that can be used as collateral, another system is required.

The compound is a type of DeFi lending rates protocol that is used for open financial applications. For example, users can earn a passive income directly by depositing cryptocurrency via borrowing and interest crypto.

Holders of the Compound have the right to vote on certain decisions, such as technology platform upgrades and the addition of new assets. As a crypto lender, you will receive a token in proportion to the amount you contributed to the liquidity pool. A CToken is unique to the digital assets available in the liquidity pool. These tokens will earn interest based on the interest rate of the liquidity pool. USDC, ETH, and DAI are the top three markets on Compound.

Aave is a popular DeFi lending platform that debuted in 2020. It is a non-custodial liquidity protocol that is open source. Aave allows its users to deposit cryptocurrency in the liquidity pool and immediately receive the same amount of tokens.

An embedded algorithm adjusts interest rates based on current demand and supply in a given liquidity pool. As a result, the interest Defi lending rates rise as the number of AToken holders grows. To learn more about asset tokenization in blockchain, read this blog.

YouHodler is another hybrid platform that offers crypto-backed lending in the form of stablecoins and fiat loans. YouHodler’s mission is to assist people in transitioning from passive holding (buy-and-hold strategy) to fully utilizing crypto assets. YouHodler, based in Switzerland, also has an exchange policy.

The exchange accepts fiat, cryptocurrency, and stablecoins. When compared to other lending platforms, YouHodler has lower interest rates. The current interest rate is 12.3%, lower than the rates offered by different lending platforms such as crypto.com, Binance, Celsius Network, and BlockFi.

Uniswap is a decentralized cryptocurrency exchange built on the Ethereum network. One of the most significant benefits of this platform is that users can gain complete control of their funds through the sale of smart contracts.

In addition, with the help of a factory smart contract, new coins can be quickly listed on the exchange. Uniswap allows users to swap their ERC-20 tokens easily.

MakerDAO is a decentralized lending platform that only lends DAI tokens. DAI is a stablecoin that is backed by the US dollar. You can easily borrow DAI using Maker while providing collateral such as BAT or ETH.

MakerDAO users are encouraged to participate in the operational earnings, which are the network’s interest rates. DAI can be borrowed up to 66% of the collateral value by users.

As DeFi evolves, we’ll see decentralized systems attempt to make all these services as good as their brick-and-mortar counterparts. After all, these services are accessible to anyone with an internet connection, meaning anyone can buy and lend cryptocurrency.

However, as with anything crypto-related, it can be a roller coaster ride, so research before deciding whether a crypto loan is right for you.