Whenever there is a shortage in the funds for investment, investors need to get the necessary amount to sustain the project. Normally, investors would resort to borrowing from the bank and pay off the bank when they profit from their investment. But would it be the same with web3? Can crypto investors loan from decentralized financing (DeFi)?
Disclaimer: This is not financial advice. The article aims to inform the readers about DeFi and the lending platforms that are available for crypto enthusiasts. Practice due diligence in researching cryptocurrency and DeFi, in general, before investing in them.
First, What is DeFi?
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Decentralized Financing (DeFi) is an innovation in web3 where developers created platforms for crypto investors to use for them to gain more while using these decentralized applications (Dapps). It is like traditional banking without the banker taking profit from the investors hard earned money. Basically, this innovation is run by codes or smart contracts, making it all automated or without the aid of any human interaction.
How Does DeFI Lending Work?
Imagine a crypto enthusiast having that extra cash flow to lend, either crypto or fiat, to others and place it on a Dapp once used by a borrower and paid the interest rate, the lender will be rewarded with the average percentage yield (APY) for lending their asset using the platform. This is also done by peer-to-peer (P2P) transactions, where there is no middleman involved in the transaction, instead it has a direct interaction with the lender and borrower.
Some platforms would offer the lender the maximum loan to value (LTV) ratio. For instance, if a platform offers a 50% ratio, half serves as collateral while the other half can be borrowed. This method can be risky because of the possibility of losing half because of unpaid loans.
One remarkable feature of this DeFi lending platform is that there are no requirements for users to perform any credit check from the government’s treasury. Basically, anyone can use the platform but of course, be mindful of the risk of lending and borrowing crypto.
Examples of DeFi Lending Platforms
Here are a few of the known decentralized lending platforms available: Aave, Alchemix, Compound, MakerDAO, PhoenixDAO, and Venus.
Aave is a decentralized lending-borrowing protocol built on Ethereum blockchain. The protocol is open-sourced, meaning anyone can see the coding for transparency. Anyone can build a third-party service to interact with the protocol.
Based on Aave’s official website, their depositors can provide liquidity to the market to earn a passive income. While borrowers can borrow in an over collateralized or undercollateralized fashion.
For more in-depth details click the link to BitPinas’ article about the Aave protocol.
Alchemix is a DeFi loan-based platform. It uses a new method to provide loans for its users that “pay themselves back over time.” Depositors need to place DAI into a smart contract. Users will receive a synthetic token to represent the deposit’s future yield farming potential. This synthetic token is known as alUSD. This can be transmuted for Dai within the platform and traded on a DeFi exchange.
Compound is another DeFi loan-based platform that uses a money market approach. This approach uses different pools of capital for each supported asset. Lenders can deposit given amounts into lending pools. In return they can continuously earn interest with no fixed loan durations.
MakerDAO is one of the widely used decentralized governance platforms and this is enabled by the stablecoin DAI.
MakerDao’s Maker Protocol is designed to reduce the price volatility of DAI. This allows lenders and borrowers to borrow other crypto. This protocol was the first Dapp to earn significant adoption and remains one of the largest Dapps on the Ethereum blockchain.
PhoenixDAO is another platform run by a decentralized autonomous organization (DAO). The platform’s goal is to achieve full decentralization through governance and is controlled by the community members investing into the network. Its Dapp allows users to earn immediate interest on their staked PHNX, its native token.
Venus is a DeFi algorithmic money market protocol based on the Binance Chain. It has its own decentralized stablecoin, VAI. Its protocol sets the interest rates in a curve yield. This is where rates are automated based on the demand of the specific market.
DeFi Lending platforms are there to help lenders and borrowers use their assets to build their portfolio by gaining rewards for lending their fiat or crypto into the platform, while borrowers can use the cryptocurrency to build their investments by creating projects in the web3. Both users need to be aware of the risks of using lending platforms and make sure that they understand the terms of the platform before depositing or borrowing crypto into it. Especially when the bear market is happening and the value of the crypto assets can decrease in its value and prolong the recovery of paying off debts.
There are other lending platforms not mentioned in the article. Always due diligence in researching on lending platforms, and other DeFi features, before entrusting the assets to these platforms.
This article is published on BitPinas: What is a DeFi Lending Platform and What are Some Examples?
Disclaimer: BitPinas articles and its external content are not financial advice. The team serves to deliver independent, unbiased news to provide information for Philippine-crypto and beyond.