Jurisdiction restrictions, volume restrictions, trust limits, high cost of services are just some of the troubles faced by those who want to take a loan or deposit with banks around the world. In this “Knowledge DeFi’cit” article, we will tell you in simple words how to use DeFi tools to take a loan without geographical limitations, credit history, as well as how to place a deposit on more favorable terms and without intermediaries.
DeFi lending and loans
The most popular DeFi services today are cryptocurrency loans and deposits. Their main difference from banking services is that user interaction with DeFi-platforms is fully decentralized and automated.
Today DeFi services are ready to offer fast, cheap loans and profitable deposits around the world. For example, you can borrow from residents and investors abroad in a few minutes – from Canada to Nigeria.
The main reasons for DeFi-loans popularity, as well as their primary advantages, are ease, transparency, and decentralization:
- Decentralization eliminates the need for a credit history or bank account. Any Internet user can use their cryptocurrency as collateral for a loan or deposit to gain interest.
- The borrower does not need to provide proof of income and other standard documents. All you need to do is connect your crypto wallet to the system.
- In the case of deposits, DeFi services provide 2-3 times higher yield than conventional banks, while decentralized loans are much cheaper than the traditional ones.
- Decentralization eliminates the possibility of the human factor as the main reason for manipulation and abuse, creating trust among users.
How it works
The most popular are simple systems where some participants make interest-bearing deposits; these funds are then distributed among other participants who take out loans secured by collateral. Deposits, credits, and collateral are made and issued in cryptocurrencies.
Accordingly, there are two main types of interest rates:
- Interest on the loan that the borrower pays;
- Interest on the deposit that the lender receives (which is, in fact, part of the interest paid by the borrower).
The rates depend on many indicators and are calculated by the system automatically in each block. Variations may be caused by a particular service’s conditions, the size of the deposit/loan, the cryptocurrency behind the deposit/collateral, the demand/availability of these assets on the platform, and more.
Since loans are secured by cryptocurrency, which is subject to strong volatility, to cover the risks, the loan’s collateral may significantly exceed the amount of the loan. This is due to the fact that in the event of a sharp change in the price of the pledged assets, in order to repay the debt, the contract will have to be closed, according to the formula in the contract and the terms of the platform; the remaining collateral will be used for repayment. Thus, the loan will be automatically repaid in any case, including through the liquidation of the position, and the excess collateral on loan is the guaranteed security factor that allows you to apply without having a credit history.
Prospects
- A profitable and simple source of income for owners of crypto assets, more favorable than simple storage;
- To meet margin trader, large investor, and other crypto participant demand for loans;
- Arbitrage.
Complications
- The complexity of use and focus on experienced crypto users, possible technical failures and errors, unfriendly and confusing interfaces largely alienate DeFi lending from the mass user;
- Regulatory risks associated with the regulators’ desire in the near future to take control of a new area of financial activity, due to the need to combat money laundering and various undesirable financing, will lead to a strong complication of rules and processes that may push away a large number of potential users.
Today’s possibilities
On the DeFi Pulse website, you can study the current statistics of the DeFi lending market in detail and see the industry leaders’ ratings.
In the following “Knowledge DeFi’cit” articles, we will continue informing you about the current situation on the DeFi market and with specific lucrative cases in this direction. Good luck, everyone!
Disclaimer: The contents of this article are not intended to be financial advice and should not be treated as such. 3commas and its authors do not take any responsibility for your profits or losses after you read this article. The article has been presented to provide readers with general information. There is only personal experience described herein. The user must do their own independent research to make informed decisions regarding their crypto investments.
