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The Ultimate Guide to DeFi Lending in 2020

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The spark of Defi Lending

Growing speculation and a new shift in attitudes towards financial markets has catapulted interest in DeFi lending. This is not just a trend but a long-term disruption in the lending market due to the substantial interest rate arbitrage available driving the acceleration of its growth. 

DeFi lending functions a bit similar to the traditional crowdlending P2P services, but there is a core difference. In DeFi the loans are issued on decentralized platforms that lock up cryptocurrencies through smart contracts on public blockchains. It lets users supply cryptocurrencies in return for a year-on-year return. DeFi lending reduces the burden of paperwork because it uses smart-contracts. This is an on-demand service with the principle of quid pro quo where one party interacts with the other and the blockchain is a transparent conciliator that records the operation and fulfills the terms of contracts. 

The unique features about DeFi lending are:

  • It is permissionless meaning that anyone has the leeway to lend their assets at the barest minimum cost
  • The selected lending protocols are audited meticulously. The code backup for lending contract funds is robust and uncompromising implying that security is taken extremely seriously.
  • Most of the DeFi lending protocols do not expect their users to transfer ownership of their inherent assets. They do not need any approval from a third-party.
  • The interest earned from lending is collated axiomatically which means that from the end-user side, there is very little maintenance work to be done to earn passive income.
  • Self-administered interest rates rule the roost as interest rate fluctuations are a direct measure of supply and demand changes

What are DeFi lending protocols

Decentralized Finance is implementing financial instruments in the form of smart contracts on Decentralized blockchain networks. Decentralized is one such financial service that aims to democratize the ability to get loans. The DeFi lending protocol ecosystem has seen humongous growth over the years. Among the several reasons why DeFi lending protocols are a must, there are 3 very strong reasons to go for it.

  • For a long-term crypto holder who is not interested in selling their crypto investment yet, but still has a list of bills that need to be paid, taking a loan on their crypto will help the holder pay for his/her daily expenses. 
  • We know that leveraged trade is executed with borrowed money; the margin is that collateral which is used to make the leveraged trade. This magnifies the investor loss or gains made on the trade. 
  • Lending protocols helps traditional crypto holders to earn interest higher than traditional savings
defi lending

The most popular ones that are high on popularity, security and ease-of-operation are:

  1. Aave
  2. Compound Finance
  3. Dharma
  4. dYdX
  5. Nuo

Most of the DeFi lending protocols can be accessed with a Web3 wallet like Metamask. Users have to source their wallet with a small amount of ETH to pay for the transactions with the capital they wish to supply. No same lending protocol has a similar risk. Our top picks are safe to lend with very little chance that your funds are compromised through any unforeseen attack.

What makes DeFi lending tempting?

A comparison of DeFi lending with heritage lending

  1. On one hand DeFi majorly circles around the lending of Ethereum based currencies, traditional markets focus on fiat currency. DeFi lending platforms use smart contracts to interact with currencies making them embrace ERC-20 tokens widely. Some of the most popular coins on DeFi lending platforms are DAI and USDC as they are smart breeding grounds for rapid smart-contract interactions.
  2. DeFi lending is permissionless meaning that the loans are hugely overcollateralized compensating for the loss of capital owing to any reason. If it is undercollateralized, immediate liquidation occurs and it is sold-off in the open-market to make sure protocol is collateralized back to what it should be. In the legacy lending platforms, loans are usually either undercollateralized or with tangible goods to avoid the case of bad debts and recovery.
  3. Mostly all of us at some point in time, take loans. It usually requires a process that one needs to undergo to ensure that the loan is sanctioned. That includes verification of income, the credit scores, the collaterals in question and so one and there is no sure shot way of saying that you will get what you want.  But with DeFi lending there is no cap on the amount of capital required. Interest also can be collected at any moment. All you need is great network connectivity. 

Most popular cryptos used in DeFi Lending

Currently, we have listed 3 hottest cryptocurrencies that are hot on DeFi lending platforms

DAI 

defi lending

Considered as a game-changer for the entire cryptocurrency ecosystem. It is a decentralized cryptocurrency that is stabilized against the value of the US dollar. It uses margin trading to react to changing market conditions and ultimately preserves its value heads-up against the major currencies dominating the world. Compared to other stablecoins that take the support of USD, this is backed by crypto collaterals which can be seen publicly on the Ethereum blockchain.

USDC

defi lending

USD coins are pegged to USD and tokenize USD to facilitate its use over public blockchains. It can be changed back to USD anytime. With the help of ERC-20 smart contracts, issuing and redeeming USDC tokens are executed seamlessly. 

Ether

defi lending

Ether – the cryptocurrency of the Ethereum network is one of the most popular tokens that are decentralized making use of distributed ledger technology. It has competitive lending rates and most of the lending protocols support ETH lending as it owns the market with the second highest market cap.

Advantages of DeFi lending

Lending with Blockchain technology involved makes the offerings not just transparent but also cheaper and faster to borrowers and lenders. Leveraging on blockchain technologies with peer-to-peer lending offers several advantages.

No paperwork

There is no need for any paperwork or a bank account while you decide to choose a crypto-backed loan. For those individuals who are unbanked and at the lowest level of the financial pyramid and those who cannot provide KYC, this feature will certainly bring cheers.

Insignificant transaction fee

Under the lending process, when the borrower puts in the loan request, it goes to a financial institution like a bank that charges you additional fees for documentation, early payment, and whatnot. The fee in question usually adds up to considerable amounts. But on the other hand, crypto-backed loans do not carry the burden of any processing or transaction charges. Compared to P2P loans, crypto-backed loans are more value for money.

Defying boundaries

In conventional P2P lending, the major barrier is the geographical boundaries but DeFi lending opens the door to cross-border lending. This is a win-win situation for borrowers and lenders because it offers diversification. With crypto-backed loans, lenders can diversify their portfolio defying boundaries to take advantage of variegation. Borrowers also get access to a large pool of lenders who are spread globally.

defi lending

The Future of DeFi Lending

DeFi lending, and lending protocols have a long way to go in terms of building infrastructures to truly support the vision, but in 2020 we are already off to a phenomenal start. In order to build DeFi lending architecture, user experience, security audits, and user education are essential.

There is enormous potential for DeFi lending to flourish because of its groundbreaking innovation, yet the future of DeFi lending is up to the efforts of the builders in developing and educating others.

It’s in all of our hands.


Check back in at DeFiRev.com to find out the latest in DeFi News.

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YFI to be added to Coinbase

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YFI, arguably the most beloved DeFi token will be added to Coinbase Pro next Monday, September 14th, 2020.

This signals a major new chapter within the YFI community, which has taken the whole DeFi sector by storm.

YFI is currently trading at $32,786 USD or 3.19167 BTC as of 8:07pm PST.


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ETH Snapshot Just 2 weeks ago: Analysis Bullish Trend Remains

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ETH records a 19-month high over Bitcoin

Just two weeks ago, the price of Ethereum touched a 19-month high against Bitcoin thanks to the massive growth in user activity. As the price of Ethereum’s Ether (ETH) went beyond $450, a major buy wall on the popular crypto exchange Bitfinex emerged. A little later than that ETG achieved a $270, a 19-month high on Bitcoin (BTC).

In the past two months, ETH has successfully maintained its upward momentum stimulating the already rising user activity on Ethereum. Additionally, the Etherscan data shows that the daily transaction volume on Ethereum rose from 420,000 in January to more than 1.2 million transactions per day in August. The huge upsurge in demand for Uniswap and small DeFi tokens has also supported the consistent demand for ETH. On the Ethereum blockchain network, users have to use ETH to cover transaction fees also called gas. The cost of gas due to the increasing daily transactions led users to purchase ETH to pay off the network expenses. 

Reliable data from Glassnode suggests that the gas costs are increasing so fast that it is causing miner revenues to spike at unbelievable rates. In a statement they said,

2020 has been a breakout year for Ethereum

Despite the recent retrace Ethereum experienced, analysts are still incredibly bullish on ETH.

“Ethereum miners earned over $500,000 USD in transaction fees in the past hour. That is a new record high for a single hour (anomalous transaction fees earlier this year excluded).”

It is unlikely that the present trend will change in the near term as second-layer scaling solutions and ETH 2.0 will take some time.

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After Charles Hoskinson says he is obsessed with DeFi, ADA rallies

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After Charles Hoskinson says he is obsessed with DeFi, ADA rallies

We have already seen how Ethereum (ETH) is dominating the space, yet Cardano (ADA) Founder Charles Hoskinson hinted that DeFi will be an area where Cardano will be focusing. In a live-streamed session called Ask me anything (AMA), he implied that off late he has been obsessed with DeFi. ADA is currently ranked the 10th most valuable crypto asset and it was up by nearly 6% in the last 24 hours trading at $0.123 per token. For the week per se, the token remained mostly unchanged trading up at a marginal 0.4%. 

Source: Coin Paprika

In the session hosted on YouTube, Hoskinson said that information about their work in DeFi has started to leak despite their plans to make official announcements later. He also briefly mentioned a novel stablecoin project in Cardano as one of the examples of its new plans. He was quoted as:

“This is going to be an algorithmic stablecoin and we think it will be significantly better than MakerDAO.” He also added that “this is just one of many DeFi things going on right now, but we’re not going to announce any of that until a little bit later.”

Hoskinson also went on to explain that despite Ethereum taking the limelight and enjoying a first-mover advantage in the DeFi space, it is not a problem for Cardano. He believes that first-mover advantage is actually a disadvantage in DeFi because this opens up the potential for mistakes with no one to refer to. You can watch the view here. 

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