Why is DeFi more suitable for lending than traditional financial systems?

In the mad pursuit of decentralization, the financial industry is seen as the most promising area. This is well understood considering the origins of bitcoin and blockchain technology. But in this era of "even babies are placed on the blockchain," the emergence of distributed finance (DeFi) provides a promising proof of the practical utility and applicability of cryptocurrency.

While DeFi covers a wider range of areas, from remittances to derivatives and investments, its most promising areas include credit and lending. Due to the openness, security and transparency of the blockchain, it can provide credit services to more people, and the interoperability of blockchains offers the possibility of creating new loan products and services.

Although DeFi has expanded significantly in the past year, it still needs a lot of work to compete with traditional financial systems. In addition, users need to be careful when using early and untested DeFi platforms and services, and be aware that not all DeFi systems are truly decentralized.

Large distributed financial lender

DeFi may be a relatively new, unclear term, but its meaning is simple, referring to the use of blockchains, cryptocurrencies, and/or smart contracts when providing financial services to customers. When it comes to loans and credit, there are many platforms, services, and companies that are using decentralized distributed ledgers to provide loan services.

The most famous of these is MakerDAO, which lends its stable currency DAI to the user, who obtains the loan by depositing ETH in the MKR system as a collateral. According to DeFi.Review, MakerDAO is the largest DeFi platform with significant profits, and its platform contains approximately $508 million in ETH. This is followed by EOS REX, which has $437 million in EOS deposits and loans to users who want additional EOS to pour cryptocurrencies on the EOS blockchain for additional CPU/NET.

Both of these platforms are infrastructure because they are primarily used to support the encryption economy and ecosystem – whether it is the EOS blockchain in EOS REX or the various cryptocurrency markets in DAI. Therefore, given that they do not lend to the public, they can be said to be inconsistent with the common sense or traditional definition of loans and credit. In addition, they account for approximately 86% of the total assets locked on the DeFi platform (DeFi.Review data), indicating that the industry is still young.

Why is distributed finance better? Although DeFi is still young, in addition to MakerDAO and EOS REX, there are many other platforms that are offering lending through this decentralized approach. Launched in September 2018, Compound has approximately $42.4 million in locked-in assets and is a decentralized digital currency lending market where you can earn interest by lending your own cryptocurrency. The Dharma platform, a peer-to-peer lending platform, was launched in April with approximately $23.91 million worth of ETH or DAI locked. In addition, there is a long list of competing products, including Cred, BlockFi, Lendoit, SALT, NUO, ETHLend and Colendi.

Another new DeFi loan platform is Bloqboard, where users can borrow or lend a range of encrypted assets, from ETH to BAT, ZRX and DAI, on the Ethereum blockchain. Its user interface is fairly simple, and visitors can choose to borrow or lend any currency supported by the platform and provide them with a variety of interest rate options that they will benefit or must pay, and users can also track through the blockchain browser. Their transactions. And as Bloqboard director Nick Cannon said in an interview, this transparency is one of the reasons why we say that distributed lending and DeFi have great potential in the future.

“DeFi brings greater accountability and transparency to investors and prepares for a healthier financial system. These products will expand opportunities for people to get a reasonable financial investment, no matter which geographic area you live in.”

Guillaume Palayer, one of the founders of Betoken, a distributed encryption asset management platform, points out that in addition to this, it will bring greater security to users and their funds:

“The main advantage lies in the control, security and no-access permissions that DeFi products provide to end users. Because there is no access permit, everyone can get services unconditionally and independently of the local financial system. And because of security and control The vast majority of DeFi products are not kept by third parties and can be withdrawn through very simple operations."

As Palayer and Cannon said, the decentralization and geographic openness of the blockchain means that DeFi loans are easier to open to the broader customer market than traditional lending methods. In addition, distributed loans are more open in the financial sense, for two main reasons:

First, most blockchain-based credit platforms do not actually require users to have good credit scores or even credit records, and the platform avoids risk by asking for collateral (usually in the form of digital currency) from the borrower.

Palayer explained:

"In the case of distributed loans, you don't need to rely on the credit system, you can customize the term and cost of the loan. As far as I know, no traditional centralized loan provider offers this advantage in a way that is untrustworthy."

The fact that you don't need a credit score is obvious. For example, the Nexo platform can provide instant loans of more than 45 legal currencies. Its co-founder Antoni Trenchev explained:

“As long as you have encrypted assets, you can immediately borrow cash deposited into your local bank account.”

Nexo claims that he has issued $300 million in loans to more than 170,000 users in the seven months to March, and Trenchev also reported that the use of blockchain and collateral based on encrypted assets means loans to users. It can be very flexible. In terms of the amount of the loan and the terms of the loan: "There is no fixed repayment schedule, there is no strict due date. As long as you have enough collateral to guarantee the money you borrow, you have the flexibility to use cash or password assets at any time. Repay your loan."

Second, in many cases, the decentralization of the DeFi lending system and the blockchain-based traits enable companies to provide credit at a lower cost, which clearly makes it affordable for more people. “In a distributed system, both borrowing and potential payment costs are low,” said Alexey Ermakov, CEO and founder of distributed payment applications.

He went on to say:

“For other reasons, this is due to the fact that there is no compliance cost or much lower than traditional compliance costs in a blockchain-based credit system, and electronic mortgages and loans are provided on the basis of smart contracts. The ability to reduce costs as well."

With the opening of the distributed loan platform, blockchain interoperability and cross-chain atomic exchange are also rapidly developing, which will provide users with more digital currency varieties for loan options.

Palayer says:

“Another great advantage due to DeFi's unlicensed accessibility is interoperability. You can get DAI from MakerDAO and convert it to ETH with uniswap or kyber to get leverage, this part will have Unlimited possibilities, we think everyone will be excited about it."

From a macroeconomic perspective, the openness and availability of distributed finance should lead to increased productivity in the global economic system, as Cannon outlined:

“As the market matures, decentralized loan services will get more 'dead capital' from around the world.”

In other words, holders of digital assets will have more opportunities to participate in lending activities without giving up their ownership of crypto assets in the future, which means that a considerable portion of them can be "sleeped" for a long time. The assets are invested in activities that promote economic development.

In this regard, Trenchev added: "Many people have been buying cryptocurrencies as a very long-term investment, and their value is expected to increase by tens or even thousands of times. These investors will not use their passwords. To pay, they don't trade. They just hold assets and expect to get an index return by holding them." (So, this will be potential users of future DeFi)

DeFi's future challenges and expectations There is no doubt that blockchain-based DeFi finance is a tempting and promising world, but the truth is that it is still in its infancy, and should be still available to potential users and the industry as a whole. Need to do more thinking.

First, the vast majority of DeFi platforms have not been tested and are under development. As the product director for SALT, Rob Odell says, this means that users should be very careful when choosing services:

“Be vigilant about your choices, and although they have many advantages, most DeFi applications are still very new – they take time to solve all the problems and test them.”

Odell also pointed out that users should consider that the services provided by some DeFi products are limited. For example, MakerDAO now only uses ETH, although MakerDAO (like some other platforms) plans to add more cryptocurrencies in the near future, and its current limitation is how far DeFi needs to go before competing with traditional financial systems. index.

In addition, as in almost every area of ​​application blockchain technology, “user education” will be one of the first key areas to ensure that DeFi can expand, mature and realize its potential. “There are a lot of challenges, but I think user education is the most important,” said Jeremy Lam, product leader for financial-oriented Ethereum expansion network OmiseGo. He added:

“The DeFi platform usually requires the ability of individuals to control their private keys. I don't think most people are willing to take on such responsibilities. Also related to user education, we must consider who is using DeFi services, and we must think about how to protect financial knowledge. People, don’t let them lose money on products they don’t know?”

Stani Kulechov is the CEO and co-founder of Swiss-based AAVE, which operates the Ethereum loan service ETHLend, who warned:

Service providers need to have certain conditions to become a true DeFi service, otherwise DeF's decentralized nature will likely put users' assets at risk.

He went on to say:

“First, make sure that the service provider does not hold your assets. This means that there must be a smart contract to hold the funds, and secondly ensure that the transaction is done entirely through smart contracts, not through third parties.”

Users should choose a DeFi project based on transparency and public records.

“More importantly, whether distributed finance can be successful or not, whether there will be significant progress in the future depends on whether the industry can solve the current resource gap in the DeFi market and can build itself around this gap. As mentioned earlier. User education is a huge challenge, and another big challenge is how to properly understand the problems DeFi is trying to solve, as well as the pain points of potential users."

Of course, there is also a need for loans that do not require a credit history, but most non-credit DeFi platforms require the use of cryptographic assets as a guarantee, which means that the success of such platforms depends on the widespread and widespread use of cryptocurrencies.

Although we certainly have not reached the level of “widespread” adoption of encryption technology, there are indications that the number of people using cryptocurrency technology has increased in recent months, compared with 2% in November 2017. 9% of Americans own Bitcoin (according to a survey conducted by Blockchain Capital in the US in April). Therefore, DeFi will take advantage of this growth to realize its potential, and it is still very promising.

“I am very confident about the growth of the huge ecosystem we can see in the next few years,” Palayer said. Similarly, Odell said, “Although it is still too early, if these solutions are transparent, open and open, distributed finance will eventually become the norm.”

Translator: 遂心, Odaily Planet Daily