Decentralized Finance or DeFi has broken all records of rationality in the past year. The overall ecosystem grew from a measly $17 billion on December 31st, 2020 to $252 billion on December 31st, 2021. Not only this gives an idea of the longevity but also highlights various use cases to come in DeFi. Decentralized finance is poised to give the banks a run for their money by cutting off middlemen and simplifying the entire value chain.
One such powerful use case is of borrowing and lending. Borrowing and lending is the backbone of any economy. Corporates borrow to grow. They create jobs and wealth for the shareholders in the process. However, individuals and companies have had limited options to raise capital till date. Borrowing from banks is subject to strict due diligence and conformation to norms. Decentralized finance seems to change this paradigm. So, today we plan to explore top 5 borrowing and lending platforms in DeFi space.
Why Decentralized Finance Lending?
Before jumping into borrowing and lending platforms directly, it is prudent to ask, why would someone need the decentralized peers? Barring a few incidents, banks have been doing a decent job in managing this pillar of the economy. So why DeFi? Here are a few reasons:
A. Paperless
Bank loans are quite a hustle. There is KYC, verifications, salary slips and endless trail of other documents. Since decentralised lending works on overcollateralization, without a central entity, you need no documents to borrow money. Simply mortgage your crypto and borrow!
B. Earn Interest:
Just like you would earn an interest for depositing money to your savings account, you can do the same with crypto. While the interest earned for your savings account barely beats inflation, things can heat up pretty soon in crypto realm. Various projects often offer additional incentives for lending their crypto.
C. Accessibility:
There are a lot of ‘ifs’ and ‘buts’ while borrowing money from the bank. For example, you might be refused loans depending on your background, job history, residence location etc.
Banks could also deny loans if they think that the reason to borrow is risky. They may not believe in your vision as much as you do. For example, it is hard to raise money from the banks if you are a crypto start up.
D. Hedge Funding:
Because DeFi loans are extremely flexible, one has an option to manage risk. Secondly, if you are bullish on an asset, you could borrow money against your assets and hence gaining liquidity without selling off.
E. Cost and Time:
The cost and time involved in traditional finance is significantly higher than DeFi. You could easily get a loan within a few minutes using cryptocurrency.
F. What about the Unbanked?
Well, there is a sizeable chunk of population that do not have access to the banks. Since they do not have any credit history, it is very difficult for the banks to lend them money.
Crypto and DeFi does not discriminate here either. As long as you have the collateral, you would get a loan.
How to Pick DeFi Borrowing and Lending Platform?
There are multiple borrowing and lending platforms, spread across different blockchains. For evaluating these protocols, one could keep the following in mind:
A. Interest Rates:
Just like you would evaluate different banks for the best interest rates before borrowing money, same applies to DeFi as well. While you are at it, do not forget to consider the implications of gas fee.
Ethereum based protocols can be really expensive because of the gas fee involved to move assets from Centralized exchanges to your Metamask wallet.
B. Assets Available:
You can mortgage different cryptos for borrowing a stablecoin (Crypto equivalent of USD). All you need to do is check if the platform has the asset you want to mortgage.
If not, you might have to swap those assets of a decentralized exchange first.
Top 5 Borrowing and Lending Platforms in DeFi:
Let us now evaluate some of the top lending platforms in the Decentralized Finance space:
A. Aave:
Aave was formerly known as ETHLend. Created by Stani Kulechov in 2017, it is developed by a London based company. Later, in September 2018, it was rebranded to Aave. ‘Aave‘ is Finnish for ghost. The logo of Aave also features a ghost signifying no central authority governing the borrowing and lending.
Total value locked in Aave stands at $12.7 billion as we are writing this piece.
Aave supports borrowing and lending on multiple Blockchains. As a matter of fact, it supports the largest number of Blockchains on any DeFi lending protocol.
The value split across blockchains is as follows:
- Optimism:$468.27k
- Avalanche:$3.21b
- Harmony:$978.37k
- Ethereum:$8.51b
- Arbitrum:$5.11m
- borrowed:$6.72b
- Fantom:$1.73m
- staking:$454.98m
- pool2:$223.55m
- Polygon:$1.19b
B. Anchor Protocol:
Anchor protocol is a borrowing and lending platform that offers up to 19.5% yield on deposit of stablecoin UST. Developed on Terra ecosystem, it allows users to earn higher yields on their crypto deposits. Compare that to a savings account which offers no more than 4% APY.
Anchor Protocol was founded in March 2021 by Terraform Labs, a South Korean fintech company founded by Daniel Shin and Do Kwon. Terraform Labs is also behind the Terra layer-one blockchain that has taken the DeFi space by storm, rising by 17,000% in 2021.
C. Compound:
Compound is the third largest lending protocol by TVL in the DeFi ecosystem. This decentralized protocol allows the users to secure their assets into a smart contract. Yet again, it is developed on Ethereum Blockchain.
Compound is audited and regularly reviewed for security. 10% of the entire interest paid is set aside as reserves and rest of it is used to pay back the liquidity providers (or the people who have deposited their money in the protocol)
D. Maker:
This borrowing and lending platform has a unique approach. Maker works on multi-collateral DAI (MCD) system. DAI is the stable coin of Maker protocol. This stablecoin is backed multiple assets which are pre-approved by the “Maker Governance“.
This ecosystem has two main assets: MKR and DAI. DAO is a decentralized lending application on Ethereum blockchain that supports the DAI, a stable coin pegged to the US. It also lets the users who have access to ETH and MetaMask lend in the structure of DAI.
E. Venus:
Venus protocol is based on the Binance smart chain. It is an algorithmic money market and synthtetic stablecoin protocol. Unique selling proposition for Venus is the fact that it enables users for minimum loss in terms of transaction fees while allowing fast transactions.
Apart from that, users can mint VAI (Stablecoin of the protocol) almost instantly by depositing 200% worth of the collateral. Both VAI and XVS (Native protocol token) are BEP-20 making it much cheaper in terms of transaction due to lesser gas fee involved.
$XVS is also a governance token that can be used to vote on various decisions like addition of new collateral types, changing parameters like fees etc. and setting priority on product improvement.
Gateway from Web2 to Web3: EPNS
So you understand what is borrowing and lending in crypto. You also know that loans are overcollateralized so that you are liquidated if your collateral loses a certain value. Problem is that crypto markets are running 24x7x365. What happens if you are liquidated at a point where you aren’t paying attention.
Unless you are a full time trader, it is very difficult to stay hooked and track your borrowed money and collateral. Which is why folks at Ethereum Push Notification System or EPNS have come up with a product that sends you notifications from a decentralized world.
Currently all notifications are centralized and sent to you via Apple or Android servers. But there is no such thing in DeFi. You are connected to a dApp instead. So EPNS takes charge of sending notifications by these protocols to you.
And guess what, unlike Apple and Google, this is consensual. You need to opt in for receiving notifications. Or else, you get paid to receive one from a protocol you haven’t opted for. Smart right?
Borrow and Lend Like there is No Tomorrow:
Well, if you are thinking that this is going to be a cakewalk, we would recommend recalibration of your thoughts. Unless you are completely aware of the nitty gritty involved with borrowing and lending in crypto, it is better that you DYOR thoroughly.
Don’t believe us? Well, for starters, there are protocols that allow for loans that you don’t have to pay back. If this is something that blows your mind, it is imperative that you kickstart your journey with the help of some experts.
For that, keep sticking around and I would love to explore all of that with you. Questions?
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Until next time..
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