Decentralized finance lending is a quickly emerging service sector in today's fintech world. It builds on previously established advances in digital assets and cryptocurrencies, along with some of the principles supporting traditional lending. DeFi lending also brings new opportunities for investors and others to look at capital in new and revolutionary ways!
What is DeFi?
In general, decentralized finance or ‘DeFi’ is simply the sector of the finance world that deals with decentralized assets and systems.
What does that mean?
Essentially, it means that institutional top-down systems are being replaced by versatile webs of decentralized activity, where all of the verification and top-level responsibility is housed in that community of users, rather than at some central arbiter’s office or desk.
Experts trying to explain this often talk about consensus-based verification. It's the idea that a transaction is verified not by a paper trail or keyholder, but by the community of asset holders for a particular blockchain or project. Think of a wedding where there is no marriage certificate. The marriage itself is verified by the testimony of everyone who was invited.
It's somewhat that way on the blockchain, and decentralized finance has arisen out of that reality.
Now, decentralized finance assets are evolving, and decentralized finance lending is one positive outcome from that. Investors will soon be able to choose from a menu of options in managing the crypto assets that they have purchased. That may also offer them attractive alternatives to traditional lending processes.
Understanding DeFi Lending
On the most basic level, DeFi lending means lending instruments attached to new digital assets and cryptocurrencies, instead of traditional fiat money.
The traditional fiat lending world has been around for a long time. We've established ways to lend against dollar-based assets.
DeFi lending, on the other hand, is entirely new. It faces some regulatory challenges, and quite a lot of confusion about everything from collateral to interest rates.
In understanding DeFi lending, it's important to know how the underlying digital assets work, to have a basic understanding of the blockchain and to evaluate the lending services and protocols offered by innovators.
The Popularity of DeFi Lending and Borrowing Protocols
In talking about DeFi protocols, experts are typically referencing blockchain projects that have been set up so as to facilitate the lending and borrowing of these digital assets.
Two of them are the DAO approach, and the Maker option, which have both been utilized on exchanges and in other venues to function as engines or protocols for DeFi lending and borrowing. A DAO or decentralized autonomous organization, as a smart contract on an Ethereum blockchain, has been one way to facilitate these types of transactions. Maker, a decentralized application allowing users to mint the dollar stablecoin DAI, is also familiar on exchange menus.
Soda: A New Up-and-Coming DeFi Lending Protocol
In this business context, some new parties are bringing forward new borrowing and lending protocols that help to streamline the use of DeFi assets.
One of these is Soda, a DeFi lending system using the Solana blockchain.
Soda facilitates a spectrum of lending opportunities such as flash loans, and runs its own on-chain credit rating system called Sol ID. Building a new credit rating system specifically for DeFii lending is going to be a critical step in making this type of lending a more established function of the finance world. Participating in events like the Solana Ignition Hackathon, Soda engineers continue to work on this approach to DeFi lending that will free up capital and drive business in this important sector.
The bottom line is that today's cryptocurrency and DeFi investors have numerous opportunities in growing their capital over time. Certain kinds of DeFi lending, including staking and farming, involve pledging capital to a particular blockchain project. Then there's Soda’s system that is more geared toward the traditional idea of lending – figuring out someone's creditworthiness and making loans accordingly. Automation is a big part of this.
Keep an eye on this rapidly developing part of the blockchain world.