Blog Invest Decentralized Lending: Inside crypto’s hot new market

Decentralized Lending: Inside crypto’s hot new market

date January 4, 2021 time 4 min read 617 views

Decentralized lending has recently emerged as a way for crypto owners to get a better deal on investment and lending products. But if you’re new to the world of cryptocurrencies, you might be confused about how DeFi works or whether it’s right for you. We’ll demystify the processes involved — and even offer a better alternative.

It’s no secret these days that decentralized lending platforms offer some of the best returns in the cryptosphere —   if you know how to use them.

Although DeFi can seem complicated, new solutions are springing up to give you some of the easy-to-use features associated with more traditional platforms.

We’re going to explain the basics of DeFi lending to help you better navigate this fast-growing industry.

Decentralized crypto lending fills a much-needed niche for investors and borrowers
Decentralized crypto lending fills a much-needed niche for investors and borrowers
(source: publish.vn)

What is DeFi lending and how is it different from normal lending?

DeFi stands for decentralized finance.

Decentralized finance is any financial activity done autonomously on the blockchain.

Decentralized lending is lending that relies on smart contracts made popular by the Ethereum blockchain. Smart contracts take the role of third parties in each transaction. The lender and the borrower agree to terms the smart contract executes the transactions when the terms are met.  

For example, a smart contract might check that a borrower has put down sufficient digital collateral for a loan before issuing money to them from a lender. Collateral is then released back to the borrower upon repayment.

In contrast, centralized lending is lending where a third-party institution acts as the arbiter of the loan. However, because the third party needs to pay employees and generate profit, they often throw fees into the equation.

Since it doesn’t use third parties, DeFi offers lower fees, which often means greater returns too — although they can be unpredictable.

Centralized vs decentralized lending — the choice depends on your individual preferences
Centralized vs decentralized lending — the choice depends on your individual preferences (source: ledger.com)

Decentralized lending platforms and how they work

To explain how DeFi lending works, we’re going to focus on three major players today: MakerDAO,  Compound Finance, and Yearn.finance.

MakerDAO

MakerDAO was one of the earliest decentralized finance protocols to become successful.

Its main offering is the cryptocurrency DAI, a stablecoin worth exactly the same amount as the US dollar at all times.

Using smart contracts, users lock their crypto assets into “vaults” to receive an equivalent USD amount of DAI. If they want to get their assets back, they must redeposit the amount of DAI they created plus a little bit of extra as interest. This is a great option for them to unlock some of the value of their crypto assets without selling them.

MakerDAO is a very basic example of a DeFi lending system using smart contracts. And today the MakerDAO system has moved into allowing collateral from things outside the crypto-sphere like music royalties contracts.

Now let’s get into a more complicated decentralized lending platform.

Compound Finance

Compound doesn’t have its own stablecoin (like DAI). It’s an autonomous lending pool where customers can give stablecoin loans to other customers who pay interest.

Just like in MakerDAO, in Compound borrowers must put down crypto collateral totaling more than the total value of the loan they take out. They get their crypto back when they pay back their loan.

All interest paid by borrowers then goes back into the pool to pay investors.

However, while DeFi systems like Compound Finance can give great rates, they can fluctuate drastically based on supply and demand. That’s where new platforms come in.

Yearn.Finance

Yearn is a platform for investors letting you access various DeFi lending protocols all in one place. 

You place your stablecoins in the Yearn system and let protocol allocate your assets to where they’ll earn the most interest. That way, you don’t have to manually figure out where you can get the best returns at any given time.

You may start by lending to a pool in Compound Finance, but if the interest rate you receive drops below a certain threshold, the Yearn protocol will move your assets to another platform like dy/dx where rates are higher.

Centralized vs. Decentralized lending

While decentralized lending has lots of positive points, sometimes centralized lending solutions make more sense for investors and borrowers.

While decentralized lending can get you better rates, these platforms are often lacking in terms of customer service.
While decentralized lending can get you better rates, these platforms are often lacking in terms of customer service (source: amazonaws.com)

As mentioned earlier, rates on decentralized lending platforms tend to vary drastically over time depending on how cryptocurrencies are performing. And because most platforms are automatic protocols, that generally means little to no support for customers.

Centralized lending is almost always more accessible since its platforms are more user-friendly and don’t require users to have technical knowledge or own crypto assets

These days the choice between DeFi and centralized finance is becoming less black and white. Today many alternative platforms offer easier access to DeFi with steadier rates and better customer service. MyConstant is one of these platforms.

Get in on the high rates of DeFi the easy way with MyConstant

At MyConstant, we offer a platform that anyone can use, regardless if you’re a longtime crypto holder or just getting started. We use DeFi tools like crypto-backed loans letting you get in on automated DeFi processes without even being a cryptocurrency holder.

You can lend USD or stablecoins on MyConstant and earn a steady rate of return of 7%. That rivals many offerings on centralized platforms! We even offer access into DeFi liquidity pools with crypto lend, letting you earn up to 11% APY on your BTC, BNB, and ETH.

Most importantly, we pride ourselves on our customer service. You can call our staff at any time of the day or night and receive live, in-person help from an expert.

If this sounds like something you could get on board with come check out our site and create your free account today.

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Tags: what is defi lending decentralized crypto lending decentralized lending decentralized lending platform centralized vs decentralized lending how does defi lending work defi lending explained

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