DeFi lending platforms have promised to bridge the gap between cryptocurrencies and traditional banking. Consequently, they serve as a new means of financial service while also fulfilling the mass adoption needs of blockchain and cryptocurrency. DeFi is popularly called open finance because it pioneers the open banking movement where individuals don’t need a major party for financial services.
This article tells you what you need to know about DeFi lending while sharing a few details about the top DeFi lending platforms. However, it is essential first to clarify what DeFi lending is and draw a few distinctions between DeFi borrowing and traditional finance.
DeFi lending and borrowing
DeFi lending, investors and lenders issue a loan or deposit fiat for interest through a distributed system and a decentralized application. On the other hand, an individual or business borrows money for interest through a decentralized network. Both lending and borrowing use DApps, Smart contracts, and other protocols used by the best DeFi lending platforms.
Why Decentralized Lending?
While Decentralized finance gave finance a new meaning, Decentralized lending provided various lending opportunities and benefits to lenders. Therefore, DeFi lending has the following benefits:
Hedge funding
In general, the cryptocurrency space is volatile, often sending investors packing. Therefore, if the investor doesn’t want to get burnt in the market, frustrating price swings, the investor or holder sell-off at a bull run; however, DeFi lending provides an opportunity for the investors who want to hold Crypto for a specified time.
Also, top DeFi lending platforms allow traders or investors to deposit Crypto for fiat to fulfill other needs without selling it off. For instance, a business that holds crypto assets and won’t want to sell to execute a project could simply approach a DeFi lending platform to deposit Crypto for fiat to execute the project.
- Earn interest in holding crypto assets
You don’t need to sell off as a crypto asset holder to avoid the bears. Instead, you lend it out with agreed interest rates defined in the smart contract. Within the stipulated time, you earn your money with interest.
Consequently, DeFi lending becomes a haven for panic sales.
Meanwhile, the underlying technology of doesn’t demand rigorous documentation, as seen in the traditional lending system. Instead, it is a function of clicks through a Decentralized Application. A crypto wallet is the only thing required to transact with a DeFi platform.
Lending and depositing on top DeFi platforms is also usually seamless and requires no more than a few minutes of processing time.
How does DeFi lending work?
Decentralized lending is as simple as taking money out of your pocket and giving it to a friend. The decentralized application and Smart contracts represent your intermediaries and negotiators, respectively. Loaning $50,000 through a DApp only requires a few clicks.
What happens is that you open a DApp, which hosts a smart contract and a pool of borrowers. The platform lets you decide at what interest rate you want to set on a loan. Concurrently, the smart contract automates the lending and borrowing agreement.
Governance of a DeFi platform is usually conducted by a community-run decentralized autonomous organization (DAO). Changes to the platform are done through a voting process, with voting power tied to the number of governance tokens held by each user. Governance tokens are cryptocurrencies minted on DeFi platforms through borrowing and lending. In a way, they are incentives for trading on a platform.
Most governance tokens in top Defi platforms are also actively traded on major exchanges.
DAOs also have active forums for discussion, troubleshooting and tech support.
Top DeFi lending platforms
A DeFi lending platform is similar to the traditional lending platform except that there is no central authority. Consequently, all your transactions are across a trustless network. However, there are several DeFi lending platforms you may like to know. They are as follows:
1. Aave [LEND]
Aave is an Ethereum-based open source and non-custodian protocol that enables the creation of money markets. Although it offers other services, it is popular for lending and borrowing. Like several DeFi lending platforms, it offers a dual DeFi token model: aToken and LEND.
The platform, which was launched in 2017, is the most popular DeFi lending platform in the market.
The AAVE Token is an ERC-20 token where lenders compound interest, while LEND is the governance token. Aave offers varieties of loans and lending services such as uncollateralized loans, “rate switching,” Flash Loan, and unique collateral types.
The interest rate varies depending on the token being deposited. Certain stablecoins, ie dollar-pegged tokens, currently offer the best returns on the platform, at around 12%.
Aave is one of the DeFi lending platforms that support many assets including Basic Attention Token (BAT), Dai (DAI), Ethereum (ETH), Kyber Network (KNC), Aave (LEND), ChainLink (LINK), Decentraland (MANA), Maker (MKR), Augur (REP), Synthetix (SNX), TrueUSD (TUSD), USD Coin (USDC), Tether (USDT), Wrapped BTC (WBTC), 0x (ZRX), and Synthetix USD (SUSD).
Maker protocol, popularly called Multi-Collateral Dai (MCD) system, is one of the most reputable DeFi lending and borrowing platforms. It was founded in 2015 as a means to circumvent the volatility of the cryptocurrency market. Hence, its native stablecoin, DAI, is pegged to the dollar for lending and borrowing on the smart contract terms.
MakerDAO, an open-source protocol built on Ethereum, enables users who have ETH and access to METAMASK to lend in the form of DAI. Similar to many other DeFi lending platforms, it hosts a dual token model: Maker, and DAI. Maker Token is the governance token that maintains stability in the system.
The platform offers users a scalable interest rate for DAI deposits.
3. Compound
The Compound is another popular openly accessible smart contract built on the Ethereum Blockchain. It allows borrowers and lenders alike to lock their crypto assets into the protocol.
Unlike other DeFi lending platforms, it allows the tokenization of assets locked in their system through the use of cTokens. Tokenization allows users to trade assets they have locked on the platform.
Consequently, when you deposit ETH, you get cToken, which can be used as collateral. On the other hand, the COMP token is its DeFi token. However, it supports a wide range of nine assets issued on Ethereum, including BAT, DAI, SAI, ETH, REP, USDC, WBTC, USDT, and ZRX.
It has a varying DeFi lending and borrowing rate depending on the supported currency. Borrowing and lending rates on the platform as of 6 December 2022 stand at 2.63% and 0.86% for a time period of 30 days.
4. InstaDApp
This is a multi-purpose DeFi platform that manages digital assets. It provides varieties of DeFi services like lending, borrowing, swap, leverage, etc. Look at it as a DeFi bank that allows you to integrate your services to serve your purpose.
The platform offers users one-click switching platforms to easily switch to cheaper lending platforms with lower interest rates, especially for Maker and Compound.
By implication, it offers you a smart wallet portal for DeFi protocols. However, it is as simple as owning a COINBASE wallet or MyEtherWallet or any related one to loan, borrow, trade or swap.
The platform is free to use, but charges ETH for transaction fees. Returns on the platform currently range from as low as 0.01% to 4%.
dYdX brought margin trading, options, and derivatives to the blockchain space, which are normally found in fiat markets and common for traditional investments. On the platform, users can trade, lend, and borrow ETH, DAI, and USDC. It also offers cross margin trading and isolated margin trading as well as using a perpetual market contract of BTC/USDC of 10x leverages
Loans on the platforms are on 125% collateral and 115% self-liquidation. Unlike many other DeFi lending platforms, it doesn’t have a native token, and as such charges trading fees in the supported tokens.
Lending rates and borrowing rate on the platform range is 0% and 0.02% as of 6 December 2022 for 30 days.
6. Dharma protocol
It is a tokenized debt and funding decentralized platform where lenders, borrowers, and other fund managers trade and transact with each other. It uses a system called Dharma Settlement Contracts, which mimics the traditional financial instruments and stakeholders like agents typically present in the loan facilitation process. Four main agents operate the network: Borrowers, Lenders, Underwriters, and Relayers. Borrowers and Lenders are simple operators. Relayers are agents that host the order book for potential lenders to browse through, while underwriters are the agents responsible for identifying the possibility of default and structure the terms of the debt issue.
The platform was recently bought by NFT marketplace OpenSea.
Dharma uses a dToken for governance and Dao as the stablecoin. The platform supports ETH and all ERC-20 tokens, along with USDC deposits, and offers scalable returns on deposits.
The platform provides a unique alternative to decentralized margin trading. It leverages bZxR token to relayers to collect trading fees. Unlike some other DeFi platforms, relayers match orders from borrowers and lenders so that borrowers may receive margin loans. However, the platform relies on the upkeep of a deep insurance fund. Therefore, charging lenders 10% of their earnings and aggregating it into the funds ensures that lenders will always be covered if borrowers cannot pay back their loans.
However, since rebranding in 2018, it has integrated two other DeFi platforms: Fulcrum Trade and Torque, a decentralized lending and margin trading platform, and a DeFi borrowing platform.
bZx supports tokens based on Ethereum, Polygon, and BINANCE Smart Chain and offers vastly scalable interest rates.
8. Anchor Protocol
Based on the Terra blockchain, this protocol allows users to earn interest on deposits of the stablecoin TerraUSD (UST). While relatively new compared to other protocols on the list, Anchor shot to fame on its flat 20% earn rate for deposits. The protocol achieves this by using interest payments from borrowers on the platform and a large UST reserve maintained by its community.
Formerly known as Mainframe, Hifi is a Polygon-based platform that offers returns on stablecoin deposits. The platform’s key feature is that it allows users to create fungible debt obligations, or a bond-like instrument, that settles on a set date.
The platform also has a bridge function that enables using tokens from other blockchains as deposits or collateral. Its governance token is Hifi Finance (MFT).
DeFi platforms are a novel way of earning returns on investments. The returns offered by top Defi platforms even outpace those offered through conventional savings accounts, given that the COVID-19 pandemic spurred a significant decline in lending rates across the globe. The incentives offered by Defi accounts, i.e., the governance tokens, also have the potential to generate income in their own right. They may be an alternate destination in which to consider putting part of your portfolio.
What is a DeFi platform?
They are platforms that offer decentralized financial services or those platforms that provide you self-banking protocols.
What is decentralized lending?
It refers to those lending methods that you don’t need a central body to make lending decisions, including Lending rates.
How does DeFi lending work?
You only need to sign up on a Decentralized application that offers the services you want. If you want to lend, click on the DeFi lending rates and other requirements you may want to lend.
Is BlockFi a DeFi?
BlockcFi is centralized while DeFi is decentralized. By implication, you don’t have your keys when using BlockFi.
How do you get into DeFi?
It is as simple as signing up to the DeFi platform of your choice to decide on lending, borrowing, saving, trading, and as the case may be.
How do you make money with DeFI?
You can make money through lending for interest, trading for profits, and so on.
What is the DeFi pulse?
It is similar to Coin Market Cap, Coingecko, and other cryptocurrency resources. However, it provides you all you need to know about the DeFi market and statistics.
What are DeFi tokens?
They are governance or native tokens of the DeFi platforms. For instance, KTY, LEND, dToken are the DeFi tokens of KittieFight, Avare, and Dharma.
