DeFi changes the route of lending and borrowing on the blockchain

world Decentralized Finance With its inherent trustless operation and easy access to funds, (DeFi) is gradually expanding to take a significant share of the global financial lending a crypto ecosystem Has grown into a $2 trillion industry By market capitalization, new products and services have emerged due to the rapid innovation of blockchain technology.

loan Has become an integral part of the crypto ecosystem, especially with the advent of DeFi. Lending is one of the core products of the traditional financial system, and most people are familiar with terms in the form of mortgages, student loans, etc.

In traditional lending, the lender provides the loan to the borrower and earns interest in exchange for taking the risk, while the borrower provides assets such as real estate, jewelry and other assets as collateral to obtain the loan. Such transactions in the traditional financial system are facilitated by financial institutions such as banks, which take steps to minimise the risks associated with making loans by conducting background checks such as know-your-customer and credit scores before approving loans.

related: Liquidity has fueled DeFi growth so far, so what does the future hold?

Lending and Blockchain

In the blockchain ecosystem, lending activities can be conducted in a decentralized manner, and parties involved in transactions can directly transact with each other through smart contracts, without the need for intermediaries or financial institutions. Smart contracts are self-executing computer code with a certain logic in which transaction rules are embedded (encoded). These rules or loan terms can be fixed interest rates, loan amounts or contract maturity dates and are automatically enforced when certain conditions are met.

Loans are obtained by offering crypto assets as collateral on DeFi platforms in exchange for other assets. Users can deposit their coins into DeFi protocol smart contracts and become lenders.In return, they receive the protocol’s native tokens, such as Compound’s cTokens, Have’s aTokens, or Wear MakerDao just to name a few. These tokens represent the principal and the amount of interest that can be redeemed later. Borrowers offer cryptoassets as collateral in exchange for other cryptoassets they wish to borrow from one of the DeFi protocols. Often, loans are overcollateralized to cover the unexpected fees and risks associated with decentralized finance.

related: Want to get a crypto loan?Here’s what you need to know

Borrowing and total value locked

People can borrow and lend through various platforms in the decentralized world, but one way to measure protocol performance and choose the right one is to look at the total value locked (TVL) on these platforms. TVL is an indicator for measuring pledged assets in smart contracts and an important indicator for evaluating the scale of adoption of DeFi protocols. The higher the TVL, the safer the protocol.

Smart contract platforms have become an essential part of the crypto ecosystem and have made borrowing and lending easier due to efficiencies in the form of lower transaction costs, higher execution speeds, and faster settlement times. Ethereum was used as the dominant smart contract platform and was the first blockchain to introduce smart contracts. TVL in DeFi Protocols grown up From $18 billion in January 2021 to over $110 billion in May 2022, an increase of more than 1,000%.

Ethereum need According to DefiLlama, TVL grew by more than 50% to $114 billion. Many DeFi lending protocols are built on Ethereum due to the first mover advantage. However, other blockchains, such as Terra, Solana, and Near Protocol, have also increased their appeal due to certain advantages over Ethereum, such as lower fees, higher scalability, and more interoperability. force.

Ethereum DeFi protocols like Aave and Compound are some of the most prominent DeFi lending platforms. But one protocol that has grown significantly over the past year is Anchor on the Terra blockchain. The top DeFi lending protocols based on TVL are shown in the figure below.

DeFi platforms offer transparency unmatched by any traditional financial institution, and also allow permissionless access, meaning any user with a crypto wallet can access services anywhere in the world.

Nonetheless, the growth potential of the DeFi lending space is enormous, and the use of the Web3 crypto wallet also ensures that DeFi participants maintain their holdings of their assets and have full control over their data thanks to the cryptographic security provided by the blockchain architecture.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk and readers should do their own research when making a decision.

The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Nilaji Kandelwal Co-founder of Indian cryptocurrency exchange CoinDCX. Neeraj believes that encryption and blockchain can bring about a revolution in the traditional financial field. His goal is to build products that make cryptocurrencies easily accessible to a global audience. His area of ​​expertise lies in the macro field of cryptocurrencies, and he also has a keen eye on the development of global cryptocurrencies, such as CBDC and DeFi. Neeraj holds a degree in Electrical Engineering from the prestigious Indian Institute of Technology, Bombay.