You are well aware that you may borrow and lend cryptocurrency on DeFi. Both lending and borrowing cryptocurrencies offer financial advantages.
Cryptocurrency lending and borrowing is the most popular service on DeFi and has been the driving force behind the development of decentralised finance.
Thanks to these services, we've learned about the benefits of decentralised financing over conventional money. Many individuals have already been barred from the banking system and have been unable to get loans since obtaining bank permission is burdensome. Paperwork is necessary, as is property verification and the necessity to get a job via a contract, among other things. In DeFi, that's a needless formality.
If you're unfamiliar with the cryptocurrency revolution, here's a primer on the subject.
And, without a doubt, this is the most appealing aspect of this new system: it turns out to be more financially advantageous for both sides. In this essay, we will look at the benefits of borrowing cryptocurrency and how it works in general.
How does cryptocurrency borrowing work?
Borrowers in decentralised finance may accomplish this without the assistance of an intermediary. They will take out loans from other users who are lenders. Lending is done on a peer-to-peer basis. Lenders and borrowers connect on a platform, sign up for a smart contract, and complete online transactions. All procedures are finished with a few mouse clicks and without an intermediary.
Everyone on DeFi can borrow bitcoin. These are loans made between people (other users of DeFi). It is entirely anonymous, and there are no paperwork or administrative requirements to get a loan.
The cryptocurrency loan and borrowing mechanism are advantageous for both parties. The borrower reaps the advantages of liquidity without having to sell his capital. The lender, on the other hand, gets interested in these loans.
Each lending pool differs depending on the protocol. Everyone must do a comprehensive study to identify which pool/interest rate/cryptocurrency is ideal.
Why are interest rates higher on DeFi?
As with traditional loans, the lender will charge interest on the loan, and the borrower will be required to return the claim in addition to the principal within a specific time frame.
It is more apparent how the lender generates money now. It is, in fact, quite similar to traditional finance, and the lender earns interest on the funds lent.
There are various explanations if you're wondering why DeFi interest rates are so high.
The absence of a middleman in the loan procedure is the first significant factor. Understand that there is no banker, room rental, attorney, contract, paperwork, and so on, all of which are substantial expenditures when obtaining a loan in conventional finance.
The only costs we have at Defi are transaction fees, and this charge is paid to the network that originated the loan. As a result, there is nothing to pay other than an utterly legal authority (to reward blockchain miners). In reality, the lender obtains a greater interest rate.
What are the benefits of using cryptocurrency lending and borrowing on DeFi?
In truth, DeFi lending and borrowing benefit both parties. Lending entails lenders earning interest on the funds they lend, and it's even one of the most popular methods to earn passive income in the cryptocurrency world.
Borrowers may also get loans at substantially cheaper interest rates than traditional loans.
However, the mechanisms of bank lending and DeFi vary significantly. When you take out a bank loan to buy real estate, your property becomes collateral. If you fail to make interest-bearing payments, the bank will confiscate your property.
So far, we can grasp it since we are acquainted with the financial system.
It is a little different on DeFi, and we will employ bitcoin instead of holding an actual item (such as a home or a vehicle) to serve as collateral. To ensure the system's dependability, the borrower must give a guarantee equal to or higher than (typically twice as much as) the loan amount.
People often borrow Stablecoins such as Tether (USDT) and deposit their cryptocurrencies (Ethereum) as collateral. Borrowers are therefore not required to sell their bitcoin and risk purchasing it back at a higher price. It is an excellent option for anybody who wishes to maintain their cryptocurrencies while fast obtaining more funds.
To give you a more concrete example, imagine that you wish to purchase a new automobile (for cash). You will then use your previous automobile as collateral to get a loan. When you pay off your loan, you get to retain your old automobile and obtain a loan with a lower interest rate than standard financing.
Conclusion
Finally, keep in mind that each platform has its own set of interest rates and laws. Similarly, you may borrow or lend cryptocurrency using controlled platforms and decentralised methods.
Borrowers should also be aware that there is a danger of liquidation fines. It may occur if the value of your collateral falls. Therefore, it will be essential to raise the value of your collateral, for example. There may be more complicated methods and platforms in Defi to better control the risk of your investments.
