Editor's Note: This article is translated fromCointelegraph, Translator: Suixin, produced by Odaily.
In the frantic pursuit of decentralization, finance is seen as the most promising field. This makes sense given the origins of Bitcoin and blockchain technology. But in this era where “babies are being put on the blockchain,” the advent of distributed finance (DeFi) offers welcome proof of the real utility and applicability of cryptocurrencies.
While DeFi encompasses a broader spectrum, from remittances to derivatives and investing, its most promising areas include credit and lending. Due to the openness, security and transparency of the blockchain, it can provide credit services to a larger population, while the interoperability of the blockchain also opens up the possibility of creating new loan products and services.
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Large Distributed Financial Lenders
DeFi may be a relatively new and poorly defined term, but its meaning is simple and refers to the use of blockchain, cryptocurrencies and/or smart contracts in providing financial services to customers. When it comes to lending and credit specifically, there are many platforms, services, and companies that are utilizing decentralized distributed ledgers to provide lending services.
The most famous of these is MakerDAO, which lends its stablecoin DAI to users, who receive loans by depositing ETH into the MKR system as collateral. According to DeFi.Review, MakerDAO is the largest DeFi platform with considerable profits, and its platform contains about 508 million ETH. This is followed by EOS REX, which has $437 million worth of EOS deposits and offers loans to users who want extra EOS to stake the cryptocurrency on the EOS blockchain for extra CPU/NET.
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Why distributed finance is better
Even though DeFi is still young, there are many other platforms besides MakerDAO and EOS REX that are offering lending in this decentralized way. Launched in September 2018 with around $42.4 million in locked assets, Compound is a decentralized digital currency lending marketplace where you can earn interest by lending your cryptocurrencies. Peer-to-peer lending platform Dharma was launched in April, with approximately $23.91 million worth of ETH or DAI locked up. Beyond that, there is a long list of competing products, including Cred, BlockFi, Lendoit, SALT, NUO, ETHLend, and Colendi.
Another new DeFi lending platform is Bloqboard, where users can borrow or lend a range of crypto assets on the Ethereum blockchain, from ETH to BAT, ZRX and DAI. Its operation interface is quite simple, 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 from or have to pay, and users can also track through the blockchain browser their deal. And as Nick Cannon, director of Bloqboard, said in an interview, this transparency is an important reason why we say that distributed lending and DeFi have great potential in the future.
“DeFi brings greater accountability and transparency to investors, preparing for a healthier financial system. These products will expand people’s access to sound financial investments, no matter which geographic region you live in.”
Guillaume Palayer, one of the founders of distributed crypto asset management platform Betoken, noted that, among other things, it will bring greater security to users and their funds:
“The main advantage lies in the control, security, and permissionless access that DeFi products provide to end users. Because there is no permission to access, everyone can obtain services unconditionally and independently of the local financial system. And because of security and controllability , the vast majority of DeFi products are without third-party custody, and can be withdrawn through very simple operations.”
As Palayer and Cannon pointed out, the decentralization and geographical openness of the blockchain means that DeFi loans are easier to open to a broader customer market than traditional lending methods. In addition, distributed lending is more open in the financial sense, mainly for the following two reasons:
First, most blockchain-based credit platforms do not actually require users to have a good credit score, or even a credit history, and the platform avoids risk by requiring collateral (usually in the form of digital currency) from borrowers.
Palayer explained:
"In the case of distributed lending, you don't need to rely on the credit system, and you can customize the term and cost of the loan at will. As far as I know, no traditional centralized loan provider provides this advantage in a trustless manner."
The fact that you don't need a credit score is obvious, as the Nexo platform offers instant loans in over 45 fiat currencies, for example. Its co-founder Antoni Trenchev explained:
“As long as you have crypto assets, you can instantly borrow cash deposited into your local bank account.”
Nexo claimed that it had issued $300 million in loans to more than 170,000 users in the seven months to March, while Trenchev also reported that the use of blockchain and crypto-asset-based collateral means loans are more valuable to users. can be very flexible. In terms of borrowing amount and loan terms:"There is no fixed repayment schedule, no strict due date. You have the flexibility to repay your loan with cash or crypto assets at any time, as long as you have sufficient collateral to secure what you borrow. "
Second, in many cases, the decentralized and blockchain-based nature of DeFi lending systems allows companies to provide credit at a lower cost, which obviously makes it affordable for a wider group of people. “In a distributed system, borrowing and potentially paying are less expensive,” said Alexey Ermakov, CEO and founder of Distributed Payments App.
He went on to say:
“Among other reasons, this is due to the fact that in a blockchain-based credit system, there are no compliance costs or much lower than traditional compliance costs, and the electronic mortgage and provision of loans on the basis of smart contracts capabilities also reduce costs.”
With the opening of the distributed lending platform, blockchain interoperability and cross-chain atomic swaps are also developing rapidly, which will provide users with more digital currency varieties for lending and borrowing options.
Palayer says:
“Another huge advantage due to the permissionless nature of DeFi is interoperability. You can get DAI from MakerDAO and convert it to ETH with uniswap or kyber to get leverage, and this part will have The possibilities are endless, and we think everyone will be excited about it."
From a macroeconomic perspective, the increased openness and accessibility of distributed finance should lead to increased productivity in the global economic system, as Cannon outlines:
"As the market matures, decentralized lending services will gain 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 encrypted assets in the future, which means that a considerable part of them can be kept in a "dormant" state for a long time assets invested in activities that promote economic development.
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Future challenges and expectations of DeFi
There is no doubt that blockchain-based DeFi finance is an attractive and promising world, but the truth is that it is still in its infancy, and more thinking should be done for potential users and the entire industry .
First of all, the vast majority of DeFi platforms have not been tested and are under development. As SALT’s product director, Rob Odell said, this means that users should be very careful when choosing services:
“Be vigilant about your options, despite their many advantages, most DeFi applications are still very new — they need time to iron out all the kinks and test.”
Odell also pointed out that users should consider that some DeFi products offer limited services. Right now, for example, MakerDAO only uses ETH, and while MakerDAO (like some other platforms) plans to add more cryptocurrencies in the near future, its current limitations are one indicator of how far DeFi will have to go before it can compete with the traditional financial system. index.
Also, like almost every area where blockchain technology is applied, "user education" will be one of the first key areas to ensure that DeFi can scale, mature, and realize its potential. “There are many challenges, but I think user education is the most important,” said Jeremy Lam, product lead at finance-oriented ethereum scaling network OmiseGo, adding:
“DeFi platforms usually require the ability for individuals to control their own private keys. I don’t think most people are willing to take on such a responsibility. It is also related to user education, we have to think about who is using DeFi services, and we have to think about how to protect those who are not financially literate. people, not letting them lose money on a product they don’t understand?”
Stani Kulechov, CEO and co-founder of Switzerland-based AAVE, which operates ethereum lending service ETHLend, warned:
Service providers need to meet certain conditions to become a real DeFi service, otherwise, given the decentralized nature of DeFi, it is likely to put users' assets at risk.
He went on to say:
“First, you need to make sure that the service provider does not hold your assets. This means there must be a smart contract to hold the funds, and second, make sure that the transaction is fully conducted through the smart contract and not signed by a third party.”
Users should choose DeFi projects based on transparency and public records.
"More importantly, whether distributed finance can succeed and 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 build itself around this gap. As mentioned earlier , user education is a huge challenge, and another huge challenge is how to correctly understand the problems that DeFi is trying to solve and the needs and pain points of potential users.”
Of course, there is also a demand for loans that do not require a credit history, but most non-credit DeFi platforms require the use of encrypted assets as collateral, which also means that the success of such platforms depends on the popularity and widespread application of cryptocurrencies.
While we certainly haven't reached a level of "widespread" crypto adoption, there are signs of an increase in crypto adoption in recent months, with about 9% of Americans own Bitcoin (according to an April survey by Blockchain Capital USA). So there is hope that DeFi will leverage this growth to its potential.
I am Odaily reporter Wu Suixin (WeChat ID wsuixin12), please note your name, unit, title and reason when adding friends.
I am Odaily reporter Wu Suixin (WeChat ID wsuixin12), please note your name, unit, title and reason when adding friends.
