What is Decentralized Lending?
An Overview Of Decentralized Lending
Ever since cryptocurrencies gained recognition, the term "decentralized" also gained popularity. So many industries have proposed decentralization to increase transparency and ease transactions. A field that has great potential for the use of decentralization is money lending, proving that banks are not necessarily needed to approve loans and take financial risks.
Decentralized Lending, also known as decentralized banking, struck in the wake of the cryptocurrency upturn in the last five years. Through blockchain, the transactions are carried out without mediators.
To this day, the largest sector for decentralized lending systems has been the lending and borrowing of crypto assets. Most high-quality products have been structured in a way that allows users to lend and borrow directly on the Ethereum blockchain without mediators. All that is required in the use of decentralized lending is an Ethereum wallet. The services are available to anyone, anywhere in the world and require no intermediary.
Basically, decentralized lending plans offer loans to businesses and the public. Even though commercial banks also offer loans, decentralized lending stands out from regular banks because it requires less or no intermediary.
Before banks, peer to peer lending methods was used to perform transactions. Consequently, traditional banking services took over P2P lending, due to the decline of trust between individual lenders. Traditional banking methods provided adequate protection but attracted higher fees and took long processing periods.
Uses Of Decentralized Lending
Decentralized lending offers a variety of services depending on your needs. You could be a lender or a borrower, as the case demands. To further explain, here are the major uses of the decentralized lending system.
Lending
Decentralized lending platforms enable crypto holders to earn passive income on their holdings, through the interest charged borrowers. This is a very safe option for lenders,to help them earn risk-less interests without giving out personal details to a 3rd party.
Borrowing
Margin trading is the most popular use for borrowing crypto. Borrowing crypto is a trading strategy that helps borrowers make money when there is a decline in the price of assets. It also allows traders to get a balance that increases profits and losses while trading. Basically, the concept of margin trading is borrowing an asset, and selling it off immediately.
Collateralized Borrowing
Presently, most decentralized lending platforms make use of a collateralized borrowing system. This method of borrowing ensures that borrowers lock up a greater value of collateral than the value of what they want to borrow.
For instance, if you want to borrow $100 worth of ZRX, you must have locked up more than that value of collateral in a different asset. For example, if you lock up $150 worth of ETH. So, if you do not repay your loan as when agreed, the lender that offered $100 of ZRX to you can seize your ETR, which is worth more than your ZRX.
However, it is possible for the prices of both ZRX and ETH to change over time. If for example the price of ETH drops and your collateral is no longer worth as much as $100. Now the lender cannot get the value of their money in return by seizing your ETH, because it will not be worth as much as what was lent to you. It is at this point that liquidation comes in.
Liquidation occurs when you automatically repay your loan by selling off some portions of your collateral to re-purchase the asset you owe the lender. Liquidations occur when your value of borrow falls beneath the collateralize level required. This is usually between 115%-150%
Benefits Of Decentralized Lending
By putting aside the traditional banking methods, decentralized lending connects both borrowers and lenders to one another on a particular platform. The connection is done based on the region of both the lender and borrower, as well as their global scale, which before now, was almost impossible because traditional bank services were limited to specific locations of the bank operation and institution.
When using a decentralized lending system, all it takes to access a loan is a device that supports access to the internet. People who want to borrow, simply enter in their request and are linked with potential lenders, as well as a clear outline of the individual terms of each available lender.
Lenders on decentralized lending platforms, make use of smart contracts to easily assess the trustworthiness of the borrower, as opposed to the long duration it will take traditional banking services to check borrower's information and the huge cost the process attracts. Follow up and transaction validation are completely done over devices. The collateral agreed on between the lender and borrower is returned automatically after the expiration of the loan period, or in cases where the loan defaults, the collateral is liquidated, excluding most of the time-consuming activities that come with liquidation.
An immutable ledger is used to keep a record of every smart contracts and transaction that can automatically trigger actions as well as verify the authenticity of data. This is a reasonable evolution in the decentralized lending system, where verification of document and trust is very imperative.
Overall, decentralized lending has become more widely accepted and it has become one of the most active divisions of blockchain. Ethereum projects, particularly, have been upgraded in their level of interoperability and global network effects.
Decentralized banking is now a really broad spectrum of finance flow. At one end are numerous platforms of finance that help people around the world to access finance. On the other end, established institutions are having their modes of finance operations changed by incorporating the use of decentralized finance systems.
To ease the process of decentralized lending, numerous applications across the world offer decentralized lending services that help people from any part of the world to either offer as lenders or to borrow from those who have, making decentralized lending easily accessible.
About BitForex:
BitForex is an exchange service platform that can be classified as one of the Top 10 cryptocurrency exchange services. It is focused on providing millions of users with a digital currency trading and investment tool that is not only safe but also professional and convenient. BitForex has a high customer-oriented culture and state-of-the-art financial technology.
BitForex is programmed in a way that it can quickly adapt to the changes of the Crypto market while introducing new features like margin trading, enhanced trading charts, derivatives, and a host of others. The headquarter of BitForex is located in Hong Kong, while there are branch offices in countries like the United States, South Korea, and Singapore.
