Decentralized Finance (DeFi) is a cryptocurrency financial term for financial applications built using smart contracts on the blockchain network, mostly on Ethereum blockchain. Some popular applications of the DeFi ecosystem include cryptocurrency lending, decentralized exchanges, derivatives, payment platforms.
The fact that 13.03 billion USD have been locked in DeFi protocols till now indicates that DeFi is rapidly disrupting the traditional financial fabric.
In this article, we will tap into the DeFi marketplace while discussing some prominent DeFi lending protocols such as Maker (MKR coin), Compound (COMP coin), AAVE (AAVE coin).
Let's witness the future of finance!
Decentralized Finance (DeFi) - The Blockchain Way of Doing Finance
DeFi is a middlemen-free financial architecture with the security and transparency of the blockchain. You don't need to pay hefty intermediary commission, nor do you fill lengthy forms; DeFi systems develop a technological trust where assets change hands swiftly and securely.
Honestly, decentralized finance has gained tremendous momentum during recent years. Here's a year-over-year DeFi growth chart derived from DeFi Pulse.
From the above graph, we can clearly see that DeFi protocol deposits went from 1.34 million USD in October 2017 to 11.6 billion in October 2020.
Now that you are aware of the DeFi potential let's discuss some popular DeFi products:
- Lending and Borrowing - You can earn decent interests on your crypto assets using DeFi lending protocols like MakerDAO. Moreover, platforms like Compound also allow you to borrow for interest income or to take out a collateral cryptocurrency loan for your own needs.
- Decentralized Exchange (DEX) - DEXes facilitate the buying and selling of cryptocurrencies without any intermediary. One such DEX - Uniswap, made headlines as it surpassed Coinbase in trading volume on August 30, 2020.
- Derivatives - Derivative platforms use synthetic price feeds to trade several financial assets on the blockchain network. You can also speculate prices and bet on the outcomes in DeFi prediction markets.
- Payments - You can also make instant payments using DeFi payment channels. Initiating payments from DeFi platforms is as easy as paying via credit/debit cards.
Most Promising DeFi Coins Native to Lending Protocols
Maker (MKR Coin)
Launched in August 2015, MKR is an ERC-20 token native to the MakerDAO platform. According to DeFi Pulse, MakerDAO tops the chart of lending protocols. This protocol has a dual-token system as it features DAI and MKR crypto coins. Maker (MKR coin) holders are incentivized to participate in the governance of MakerDAO protocol. MKR also maintains the stability of DAI stable coin, as MKR is minted or burned depending on the price fluctuations.
Recently, MKR holders agreed to accept real-world assets as collateral for loans. Remember, the utility of a platform determines the value of an asset. MakerDAO is the top lending protocol, and thus, Maker (MKR coin) is attracting more and more investors.
Compound (COMP Coin)
The compound is an emerging decentralized lending protocol that allows users to lend their crypto holdings to borrowers and earn interests.
The compound platform issues two tokens:
- cToken - This crypto coin is given to lenders; these coins reflect their deposits. You can trade a cToken without any restrictions, and it can be redeemed for the deposited crypto coin.
- COMP Coin - Every time a user borrows, repays, or withdraws the asset, they are rewarded with additional COMP coins. COMP holders also have a say in the Compound's governance.
Aave (AAVE Coin)
Aave is a decentralized lending-protocol that allows users to lend, borrow, and earn interests without intermediaries. Running on Ethereum blockchain, Aave's lending pools enable users to lend or borrow 17 different cryptocurrencies, including ETH, BAT, and MANA.
Like any other lending protocols, Aave requires borrowers to deposit collateral. The borrowers are given aTokens up to the value of their deposits. Moreover, users can get instant loans, thanks to Aave's 'flash loans' feature.
Aave issues two tokens:
- aToken - Issued to lenders so they can collect interest from deposits
- LEND (AAVE Coin) - LEND token holders enjoy several benefits, including loan discounts, early loans, and much more.
If your head is spinning with confusion, here's a side-by-side comparison of these assets:
Top 5 Benefits of Cryptocurrency Lending and Borrowing
Considering the DeFi boom, cryptocurrency lending and borrowing will soon take over the traditional lending systems.
Still skeptical? Here are the top advantages of crypto lending and borrowing -
Traditional lending platforms require a bank account and a plethora of paper works. Cryptocurrency lending solves this issue as it does not consider the credit score, nor does it need a bank account. Thus, be it a bank-account holder or an unbanked individual, crypto lending is for everyone through the transparent blockchain ecosystem.
The crypto loan amount depends on your collateral. However, all other terms are customizable and transparent (no hidden charges like traditional lending). You get to choose your loan term, repayment structure, loan-to-value ratio, the asset form you want to be paid in, etc. You will also find the best interest rates on cryptocurrency lending platforms.
The crypto lending process becomes a breeze as it does not require filling lengthy forms and submitting tons of documents. Most cryptocurrency lending platforms issue loans within 24 hours. Also, if you opt for crypto flash loans, you will get a loan within seconds. Same applies to those willing to lend their cryptocurrencies to earn interest. This is also known as an “Active Hodl” strategy.
To get your crypto loan sanctioned, you don't need to pay exorbitant fees, and as the DeFi ecosystem is decentralized, there is no middlemen-fee either. Usually, there is a one-time service fee, and that's it.
Cryptocurrency lending is decentralized and runs on a blockchain network. Moreover, the reputed crypto lending platforms store 95% - 100% of user's funds in a cold wallet. Also, they have a robust strategy and security measures against DDoS attacks.
The best part of crypto lending platforms is that they can prove to be a great income source. Coindesk reported that the annual returns on DAI 3.5% to 8%, whereas returns on ETH ranges from 0.5% to 3.6%. The dividends vary from platform to platform.
Let's understand the crypto lending universe in more detail by looking at the DeFi loan amount in 2019 and 2020.
* The data is taken from loanscan.io
The DeFi loan, which was 22.4 million USD in January 2019, has reached 2 billion USD in November 2020.
The Bottom Line
The decentralized finance ecosystem will continue to rise as more and more people embrace cryptocurrencies. And with it, the DeFi products like decentralized exchanges, derivatives, cryptocurrency lending, borrowing, etc., will also unlock new potentials.
If you are looking to invest in lending protocol coins, Maker (MKR coin), Compound (COMP coin), and Aave (AAVE coin) must be on your list. Nevertheless, while lending, borrowing, or investing in crypto assets, you must do your research and remember about risk management as the value of cryptocurrencies constantly fluctuates.