How does lending and borrowing work in DeFi?
DeFi lending enables users to become lenders or borrowers in a completely decentralized and seamless way, while enjoying full custody over their funds.
It is based on smart contracts that run on open blockchains, mostly on Ethereum. This is also why crypto lending and borrowing based on DeFi, in contrast to CeFi, is available to everyone with no need for sharing your personal information or trusting someone else to store your money.
We all know that crypto assets fluctuate, but keeping them idle in wallets does not bring income. Here, DeFi comes into the picture.
DeFi loans give you the ability to lend your crypto assets to borrowers and earn money. Banks have always been using this option to the fullest. Now, thanks to DeFi, anyone can be a lender. So, you can loan your funds to others, and you will be able to generate income on that loan. It can be utilized through lending pools, loan companies of traditional banks.
Investors can collect their crypto assets and distribute them to borrowers via smart contracts. There are various ways to distribute funds. So, it is recommended to do your own research to identify the most suitable type of investing. The same goes for borrowers due to a wide range of accessible options.
While taking a loan from a traditional financial company, collateral is needed that can be associated with that loan. For example, for a car loan, a car itself is necessary. When a customer does not pay back the loan, the company can seize the car.
The same is accessible in the decentralized ecosystem. The main difference is that the system is anonymous and does not involve any physical property as collateral.
If you are ready to get a loan, you have to offer something more valuable than the loan sum. This smart contract is used to deposit these funds at least equal value to your loan.
It is important to notice that any digital asset can be used as collateral. For example, if a user plans to borrow one BTC, there is a need to deposit the price of one BTC in LTC.
I hope you find this article useful. DeFi is a complicated subject and here at DeFi Snacks, our goal is to break down the important concept in simple terms for everyone.
If you found this article useful, feel free to support by subscribing below!