If you’ve been paying attention to the technology sector as a whole, you might have heard something about the massive explosion of companies and services around something called DeFi lending.
But if you haven’t read up on this in-depth, you may be wondering about just how this type of system works.
What Is DeFi?
First of all, decentralized finance or ‘DeFi’ is a broader sector based on certain kinds of financial assets and exchange systems. By definition, DeFi assets and systems are decentralized. That means there is no central administrator of the assets and systems in question.
The most straightforward and basic example is Bitcoin. Bitcoin was the first cryptocurrency and was based on a truly decentralized blockchain model. So it’s a “DeFi asset.”
Here is more about how this works – with Bitcoin, there is no bank verification needed and no central administration because Bitcoin works on a consensus-based verification system. In other words, the verification is through the people who hold Bitcoin as a collective community, and the blockchain ledger that shows the history of transactions.
Contrast that to fiat money systems like the dollar. The dollar amounts are centrally administrated, and transactions are charted by banks and financial institutions. Otherwise, how would anyone know where their money is?
On the other hand, all of this type of verification is baked into Bitcoin inherently. Because the blockchain ledger has natural transparency, the stakeholders can see what’s happening with Bitcoin assets.
To be sure, this opens the door for what’s called a 51% attack – if any single party holds more than 50% of the decentralized assets, they can create all kinds of confusion and possibly fraudulent transactions. But with that loophole fixed, decentralized finance has a big draw, and more people are paying attention to its benefits.
Understanding DeFi Lending
So let’s talk a bit about DeFi lending.
When you have a decentralized finance asset like Bitcoin or some other token or asset that’s not centrally administrated, you may want to earn interest on it the same way you would with traditional currencies.
With policies set by central banks, traditional interest is near an all-time low. It’s difficult to make much money on fiat money assets. You can’t just put them in an account and expect them to grow by 6%, 7% or 8%.
DeFi lending has taken off in part because DeFi asset holders can and do get these kinds of higher interest rates. Similar to traditional lending, when someone stakes or pledges their crypto in a particular environment, their asset gets locked in and used and they get interest on it.
3 Protocols That You Can’t Miss In 2022
With that in mind, some companies are working hard to be on the vanguard of creating DeFi lending protocols that work for users. Some of these look a lot like traditional lending services.
Take Soda protocol for example. This company is in an unprecedented effort to introduce new credit rating systems for DeFi asset holders. In the traditional finance world, those credit ratings and credit evaluation systems are centrally important to lending outcomes. So building them in the DeFi space is a major and much-needed innovation. Soda also offers lots of pairs, excellent transaction systems, and plenty of liquidity.
Another notable protocol is AAVE, which works on blockchain technology managing a transaction database. Users love the stability, safety and reliability of AAVE, and can log on wherever they have access to the Internet.
And lastly, a name in DeFi lending protocols is Uniswap. With Uniswap, a user can swap two Ethereum assets in a liquid environment. It’s secure and private, and there are lots of trading options available.
Many of these DeFi lending protocol systems work in the context of what’s called liquidity aggregators. These mammoth exchange environments are building on-ramps between individual platforms and systems, and creating more availability for a range of assets and exchange features.
All in all, DeFi lending and the protocols behind it are blossoming in a big way in today’s financial world. Look for this to continue as cryptocurrency and other decentralized finance assets become more useful and valuable in the years to come.