SCB 10X presents a related story. Decentralized Finance continues If talking about one of the hottest DeFi financial services, there must be a matter of DeFi Lending or borrowing money in the form of Decentralized Finance is present in virtually every blockchain discussion, and DeFi Lending is one of the mechanisms that have brought many people to use it. Cryptocurrency In order to earn serious returns as well, however, many people may wonder about the definition and working of DeFi Lending due to its newness. On this occasion, SCB 10X would like to introduce this kind of financial service to watch.
DeFi Lending A Strong and Real Lending Idea With Blockchain
Borrowing is an essential activity of financial services and the financial system. Borrowing leads to many other economic activities. Of borrowing money is that the lender gives funds to the borrower for which the borrower pays interest on the amount borrowed. Borrowing is the process of creating a money market where an intermediary is a bank or financial institution to serve the needs of both parties.
However, as the mechanism and demand for borrowing continue to grow, The traditional financial system began to reveal problems. Whether it is the allocation of loans to intermediaries that require more steps to maintain the principal It brings about high processing costs, making depositors to borrow less interest. Borrowers are increasingly facing difficulties in borrowing.
Such problems led to the adoption of innovations from Blockchain to solve the problem, resulting in DeFi Lending. Cryptocurrency to drive the process to be carried out effectively
DeFi Lending is a fast growing service following the trends in the DeFi industry, a prime example of which is the growth of Compound. (referring to the amount of funds that users put in to use the service) up to $10 billion in April 2021, becoming the first DeFi provider to hit this record.
How does DeFi Lending work?
DeFi Lending works like depositing and borrowing money in a bank. But switched from banking transactions to working with the Defi Lending Platform instead, where lenders deposit Fiat Currency or “currency” used for legal settlements into the system. while the borrower who wants to use that currency will request a loan by bringing Cryptocurrency as a collateral asset The borrower will receive Cryptocurrency that is used as a guarantee when repaying the debt from the loan with interest The lender will receive interest as a return on the transaction. However, if the borrower is unable to pay the debt Cryptocurrency used as collateral, it will be vested in the lender.
DeFi Lending will be automated on the platform by programmed from innovations on the Blockchain. One of the strengths of DeFi Lending is that borrowers and lenders do not need to show any information. to assess the reliability of the service Just by placing the existing assets on the platform according to the conditions, the loan activities can be carried out.
In most cases, DeFi Lending Platform providers will allow borrowers to borrow less than the value of the collateral asset to prevent price changes that could affect the borrower's value above the value of the collateral asset. In some platforms, the value of the collateral assets must be higher than the value of the loan at least 150%.
Despite such stipulations, DeFi lending is a popular financial activity. This is because borrowing will become liquid at asset value faster than selling assets. The borrower retains ownership of the asset after the debt is settled. At the same time, the lender earns interest on the service.
Benefits and Challenges to Know of DeFi Lending
In addition to expanding the use Cryptocurrency At full capacity, DeFi Lending is still useful to both users. financial institution and related persons as follows:
- Digitally Enhance and Improve DeFi Lending is an innovation that is rooted in the development of digital technology, so it can be transformed with the development of additional technologies over time. Moreover, the whole process is already digital. Service providers can always leverage other technologies, such as using AI to analyze transaction data for signs and potential fraud in the system.
- It uses less personal data than DeFi Lending. Currently, the process is designed for everyone who has. Cryptocurrency can borrow money Thus, the borrower does not need to provide personal information to the intermediary for consideration as before. which in addition to the risk of data leakage It also reduces the likelihood of credit bias that leads to unwanted debt.
- Reduced Enforcement and Debt Collection DeFi's concept is asset-backed loans. Like a home or car loan The borrower must bring the property as collateral, however, despite the written contract. But executing lawsuits in case of default is not an easy task and is a huge cost for all parties. DeFi Lending can solve this problem by seizing collateral assets according to the terms of the loan agreement clearly stated.
However, despite its interesting benefits, DeFi Lending also has some challenges to consider:
- The high use of collateral assets makes it difficult for many to access services. Even asset guarantees are useful. But the use of high-value collaterals is also a barrier for those who need access to a decent-sized loan to work with. which in the future if there is an appropriate system improvement The value of collateral assets may also decrease, which makes it easier for people to access loans.
- value price change Cryptocurrency This is the overall challenge of the industry. Cryptocurrency And there is a consequence to DeFi Lending, as it is largely still based on collateral-based processes, where rapidly changing values affect lending limits and guarantees. Therefore, it caused the use of collateral assets much higher than the required value in order to control the borrowing process.
To give a clearer picture of how DeFi Lending is delivered, we would like to take an example from the top 10 billion dollar locked-in service providers like Compound and Aave, both of which have Service methods are as follows.
Compound
DeFi Lending Platform service providers that use Smart Contracts to carry out the process of managing and storing funds on the Platform. Compound functionality is that when crypto is deposited, the system will change the coin to cToken according to that currency, for example, if ETH is deposited, it The value of the cToken is referenced to the exchange price between the cToken and the Token. The cToken runs on ERC20 so it can be sent to other wallets, and every exchange carries additional interest in value to the cToken holder.
when making a loan The borrower must bring the cToken as a collateral asset. The interest rate and pledged asset rate are determined based on the actual market price data determined using Compound's algorithm.
Most recently, Compound issued COMP coin in 2020. It is a coin that gives holders the right to decide on the direction of the platform, such as adding new assets to the service. Protocol upgrades and other technical upgrades
Ghost
An open-source DeFi Lending service provider that has gained quite a bit of popularity after it started in 2020. The method is in line with Compound, when it brings Cryptocurrency deposits, the system will change the coin to aToken, but the difference of aToken is that it has a value equivalent to that of the 1:1 crypto currency. Aave's interest payments will be paid directly to the Ethereum account or address as specified. from the cToken, which has to wait for the transaction to increase in value.
borrowing The borrower must bring aToken as collateral as usual. but the interest rate The collateral rate is referenced from the system in Chainlink, and a self-calculated quote may be used where necessary.
From this blog, it can be seen that DeFi Lending has the same principle as traditional lending. However, the development of new technologies and ideas will make DeFi Lending not stand still. SCB 10X will follow the movement to present to everyone on the occasion. next
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