How DeFi lending can restructure older financial systems |
DeFi is short for “decentralized finance.” It is made up of a set of smart contracts that run on the Ethereum network. It gives users the ability to lend money to other people, companies, and organizations, and to borrow money from other users. Unlike in conventional financial systems, where lending comes from banks, and borrowing comes from individuals, DeFi allows users to act as both lenders and borrowers. It’s a revolutionary way of structuring financial services; the old financial system is built upon a pyramid of debt and interest, while DeFi is built upon a network of trust and interest. “The goal is to help those who are interested in this space to learn the basics of how to write good blog posts to pitch
The above title was taken from a paper that describes how decentralised finance (DeFi) can use smart contracts to introduce liquidity, transparency and security to existing financial systems. Rather than having to rely on banks and other large financial institutions looking to turn a large profit, people can cut out the middleman and become their own banks. With DeFi, they can receive loans directly from peers, rather than having to apply for them through a bank that will decide whether or not to lend and how much interest to charge.
There is a large amount of money that is meant to be invested or lent in the various financial systems of the world. The problem is that this money usually is in an older form that cannot be used by those in developing countries who need it most. To combat this, a number of firms have started looking into how digital finance could be used to solve this problem. A blog for the design of a new type of currency for a cryptocurrency blog. The goal is to make the currency easy to use and recognizable.. Read more about defi borrowing and let us know what you think.
Since the rise of the world’s first cryptocurrency, bitcoin, we’ve seen everything from stablecoins to fully decentralized financial projects. While stablecoins have brought stability to highly volatile cryptocurrencies, DeFi has introduced new ways to generate revenue. One of these popular methods is borrowing. The outbreak of the pandemic prompted people to look for investment opportunities. DeFi Lending has opened a way to make money with crypto stocks without the traditional loan gatekeepers. Instead of banks or other centralized structures, people can now choose a decentralized platform to borrow or lend. This new form of lending has really taken off, with over $29 billion placed on the various DeFi lending platforms. In this article, we will look at some of these loan protocols and how they work:
MakerDAO, developed in 2018 by Rune Christensen, is an organization that develops loan and stackablecoin technologies on the Ethereum network. It allows users with cryptocurrencies to borrow capital in a stablecoin called DAI. The platform is the leading credit protocol on DeFi pulse with over $10.11 billion in assets.
How it works
Anyone can include cryptocurrencies in a smart contract to generate a certain amount of IAD. These IADs can then be converted to fiat or exchanged for any other cryptographic asset. The more cryptocurrencies there are, the more IADs can be borrowed. To unlock locked digital assets, users must surrender their DAI balance and MakerDAO fees. Since most cryptocurrencies are volatile, if the price of a locked asset falls below a certain range, the MakerDAO protocol immediately sells the collateral to recover the borrowed IADs plus penalties and fees. This threat of liquidation keeps the project stable and ensures that no one abuses the system. In contrast, if the price of a locked asset rises, users will receive additional IADs. In addition to the stable DAI currency, MakerDAO uses MKR tokens to manage its system and support DAI stability. The DAI is created when someone takes out a loan, and the MKR is created or burned based on how close the DAI is to its $1 anchor. When the ICD is stable, the protocol burns the MKR to reduce the total inventory. When the DAI drops below $1, more MKRs are issued, increasing supply and keeping the MakerDao lending protocol stable. In terms of utility, MKR owners can vote on decisions made by the MakerDAO board. They are also encouraged to act in the interests of the Protocol.
Compound, invented by former economist Robert Lishner, is DeFi’s main credit protocol. Borrowers can borrow against their cryptocurrencies and lenders can borrow against digital assets. At first glance, Compound works in the same way as other credit protocols, but it distinguishes itself by tokenizing the balances stored in the system with cTokens.
How it works
Like MakerDAO, Compound also uses cryptocurrencies as collateral to borrow money. However, instead of DAI or another token, Compound issues ERC-20 cTokens (or Compound Tokens), which are user funds embedded in the protocol. Simply put, when users deposit a cryptocurrency as collateral, they receive a corresponding amount of cTokens. For example, users receive cETHs for the ETH view. On the other hand, users can invest their cryptocurrencies to earn interest. For example, users receive cETHs to deposit ETHs to earn compound interest. Each registered asset has its own value, and the supply and demand values of the underlying asset determine the interest rates that lenders and borrowers receive and pay. Another unique factor of Compound is that all cTokens generated in exchange for crypto-currencies become freely usable, mobile and tradable in other DeFi applications. In addition to receiving interest on crypto assets, users can also borrow other crypto currency on Compound by posting collateral in exchange for the strength of the loan. The more borrowing power you have, the more cryptocurrencies you can borrow. Compound avoids liquidation of frozen assets by operating on the concept of excess collateral. This means that borrowers have to offer more value than they want to borrow. To usher in a new era of DeFi lending and borrowing, TrustToken has launched TrueFi, a collateral-free lending protocol. The TrueFi protocol brings something new to the lending channel: Cryptographic credit scores based on on- and off-chain data and the wisdom of the TRU token holder crowd. Thanks to this unique approach, more than $105 million in loans have been made since November 2020 without a single default. At the time of writing, the total value involved with TrueFi is nearly $100 million.
How it works
Unlike other loan protocols, TruFi does not require approved borrowers to post collateral to obtain loan funds. The loans are drawn from pools of loans funded by depositors of stable currencies such as TUSD, USDC and soon USDT, with the depositors receiving a competitive return but also assuming some risk in the event of default. To get a loan, applicants provide data about their business and cryptocurrency history, which results in a credit score that determines TrueFi’s loan terms for borrowers – and could eventually become the basis for loans on other DeFi platforms. Borrowers who fail to pay by the deadline may face legal action under the original loan agreement and see their credit rating downgraded. In the first version of TrueFi, loans were based on borrower proposals voted on by TRU stackers. However, in the recently launched TrueFi V3, the platform relies on a credit model based on several factors, including debt repayment history, business environment, transaction and trading history, assets under management and credit metrics. In addition, with the launch of V3, TrueFi offers support for multiple unsecured lending assets and will soon support virtually all assets on Ethereum for borrowing and lending.
The rise of DeFi in lending in recent years is evidence that this trend has the potential to reshape the entire financial system. But like all technology, it has its unpleasant sides. What happens if the third party’s smart contract turns out to be faulty in the rental register? There is also a risk of the borrower’s APR rising sharply in a short period of time. Although the whole borrowing process is straightforward in the above mentioned protocols, users should ensure that they are working on a secure platform.
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The current financial system is very complex. It’s not just a matter of banks and loans. There are all kinds of financial institutions, like hedge funds, stock exchanges, futures markets, and other derivatives. And even though we trust them to hold and manage our money, we don’t really know how these institutions work or how to make them more compatible with the way we live today. But what if there was a way to structure finance in a way that is more accessible to the average person? What if we could make the old system easier to understand and more compatible with new technologies?. Read more about defi collateral loan and let us know what you think.