The world of decentralized finance (DeFi) is gradually expanding to occupy a significant portion of the world’s financial lending space due to its inherently unreliable investment practices and accessibility to capital. As market capitalization has grown the crypto ecosystem into a $ 2 trillion industry, new products and products have emerged thanks to the fast-growing innovations in blockchain technology.
Especially with the advent of DeFi, lending and borrowing has become an integral part of the crypto ecosystem. Lending and borrowing is one of the core services of the traditional financial system, and most people are familiar with terms such as mortgages and student loans.
In traditional borrowing and lending, the lender provides the borrower with a loan and earns interest in exchange for taking risks, while the borrower provides assets such as real estate and jewelry as collateral to obtain the loan. Such transactions in traditional financial systems are facilitated by financial institutions such as banks. Banks and other financial institutions take steps to minimize the risks associated with providing a loan by conducting background checks such as Know Your Customer and credit score before the loan is approved.
Related: Liquidity has helped DeFi grow so far, but what’s the outlook for the future?
Borrowing, lending, blockchain
In the blockchain ecosystem, lending and borrowing activities can be carried out in a decentralized way, and the parties involved in a transaction can trade directly with each other through smart contracts without an intermediary or financial institution. Smart contracts are self-executing computer code with specific logic in which transaction rules are embedded (encoded). These rules or loan terms are fixed interest rates, loan amounts, or contract expiration dates and are automatically enforced when certain conditions are met.
Loans are obtained by offering crypto assets as collateral for the DeFi platform in exchange for other assets. Users can deposit their coins in a smart contract with the DeFi protocol and become a lender. In return, protocols will be issued native tokens, such as compound cTokens, Have aTokens, and MakerDao Dai. These tokens represent the amount of principal and interest that can be redeemed later. Borrowers provide crypto assets as collateral in exchange for other crypto assets that they want to borrow from one of the DeFi protocols. Loans are usually oversecured to account for the unexpected costs and risks associated with decentralized lending.
Related: Want to take a crypto loan?This is what you need to know
Borrowing, lending, locking total amount
In a decentralized world, you can rent and borrow through different platforms, but one way to measure protocol performance and choose the right one is the total value (TVL) locked on such platforms. Is to observe. TVL is a measure of the assets bet on smart contracts and is an important indicator used to assess the scale of adoption of the DeFi protocol, as the higher the TVL, the more secure the protocol.
Smart contract platforms have become a major part of the crypto ecosystem, facilitating borrowing and lending with the efficiency of lower transaction costs, faster execution speeds and faster settlement times. Ethereum is used as the leading smart contract platform and was also the first blockchain to introduce smart contracts. TVL for the DeFi protocol increased by more than 1,000% from just $ 18 billion in January 2021 to over $ 110 billion in May 2022.
Ethereum accounts for more than 50% of TVL at $ 114 billion, according to DefiLlama. Many DeFi lending protocols are built on top of Ethereum, with the advantage of the innovators. However, other blockchains such as Terra, Solana, and Near Protocol are also gaining traction due to certain advantages over Ethereum, such as reduced charges, increased scalability, and improved interoperability.
Ethereum DeFi protocols such as Aave and Compound are some of the most famous DeFi lending platforms. However, one of the protocols that has grown significantly over the past year is Anchor, which is based on the Terra blockchain. The top DeFi lending protocols based on TVL can be seen in the graph below.
The transparency provided by the DeFi platform is unmatched by traditional financial institutions and allows unauthorized access. This means that any user with a cryptocurrency wallet can access the service from anywhere in the world.
Nonetheless, the growth potential of DeFi lending space is enormous, and with the Web3 crypto wallet, the crypto security provided by the blockchain architecture allows DeFi participants to retain their assets and complete their data. You will be in control.
This article does not contain any investment advice or recommendations. All investment and transaction movements carry risks and readers need to do their own research when making decisions.
The views, ideas and opinions expressed herein are for the author only and do not necessarily reflect or express the views or opinions of Cointelegraph.
Niraji Kandelwar Co-founder of CoinDCX, an Indian crypto exchange. Neeraj believes that cryptocurrencies and blockchain can revolutionize the traditional financial sector. He aims to build a product that makes cryptography accessible and easy for audiences around the world. His area of expertise is in crypto macros, with a keen eye for global crypto development such as CBDC and DeFi. Neeraj holds a degree in electrical engineering from the renowned Indian Institute of Technology Bombay.