The world of decentralized finance (DeFi) is gradually expanding to encompass a significant portion of the global financial lending space by virtue of the inherently trustless manner of operation and ease of access to capital. As the crypto ecosystem has grown into a $2 trillion by market cap industry, new products and offerings have emerged thanks to increasing innovation in blockchain technology.

Loans and loans have become an integral part of the crypto ecosystem, especially with the rise of DeFi. Loans and loans are one of the main offerings of the traditional financial system, and most people are familiar with the terms in the form of mortgages, student loans, etc.

In traditional lending and borrowing, a lender makes a loan to a borrower and earns interest in exchange for assuming the risk, while the borrower provides assets such as real estate, jewelry, etc., as collateral to obtain the loan. Such a transaction in the traditional financial system is facilitated by financial institutions such as a bank, which take steps to minimize the risks associated with making a loan by conducting background checks such as Know Your Customer and credit scores before a loan is approved. loan.

Related: Liquidity Has Driven DeFi Growth To Date, So What’s The Future Outlook?

Loans, loans and blockchain

In the blockchain ecosystem, lending and borrowing activities can be done in a decentralized way where the parties involved in a transaction can deal directly with each other without an intermediary or financial institution through smart contracts. Smart contracts are self-executing computer codes that have a certain logic in which the rules of a transaction are embedded (encoded) in them. These rules or loan terms can be fixed interest rates, the loan amount or the expiration date of the contract and are automatically executed when certain conditions are met.

Loans are obtained by providing crypto assets as collateral on a DeFi platform in exchange for other assets. Users can deposit their coins into a DeFi protocol smart contract and become a lender. In return, tokens native to the protocol are issued, such as cTokens for Compound, aTokens for Have, or Dai for MakerDao, to name a few. These tokens are representative of the principal and interest amount that can be redeemed later. Borrowers provide crypto assets as collateral in exchange for other crypto assets they wish to borrow from one of the DeFi protocols. Loans are typically over-guaranteed to account for unexpected expenses and risks associated with decentralized finance.

Related: Want to Get a Crypto Loan? This is what you need to know

Loans, loans and total value locked

One can lend and borrow across various platforms in the decentralized world, but one way to measure the performance of a protocol and select the right one is by looking at the Total Value Locked (TVL) on those platforms. TVL is a measure of assets staked in smart contracts and is an important indicator used to assess the scale of adoption of DeFi protocols, as the higher the TVL, the more secure the protocol becomes.

Smart contract platforms have become an important part of the crypto ecosystem and facilitate lending and borrowing due to the efficiencies they offer in the form of lower transaction costs, faster execution speed, and faster settlement time. Ethereum is used as a dominant smart contract platform and is also the first blockchain to introduce smart contracts. TVL on DeFi protocols has grown by more than 1,000%, from just $18 billion in January 2021 to over $110 billion in May 2022.

Ethereum occupies more than 50% of the TVL at $114 billion according to DefiLlama. Many DeFi lending and lending protocols are built on top of Ethereum due to first mover advantage. However, other blockchains, such as Terra, Solana, and Near Protocol, have also gained traction due to certain advantages over Ethereum, such as lower fees, higher scalability, and more interoperability.

Ethereum DeFi protocols like Aave and Compound are some of the most prominent DeFi lending platforms. But one protocol that has grown significantly in the last year is Anchor, which is based on the Terra blockchain. The top TVL-based DeFi lending protocols can be seen in the chart below.

The transparency provided by DeFi platforms is unmatched by any traditional financial institution and it also allows permissionless access, meaning that any user with a crypto wallet can access the services from anywhere in the world.

However, the growth potential of the DeFi lending space is huge, and the use of Web3 crypto wallets also ensures that DeFi participants remain in control of their assets and have full control over their data by virtue of the crypto security provided. by blockchain architecture.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.

The views, thoughts, and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Neeraj Khandelwal is a co-founder of CoinDCX, an Indian crypto exchange. Neeraj believes that cryptocurrencies and the blockchain can bring about a revolution in the traditional financial space. His goal is to create products that make cryptocurrencies accessible and easy for global audiences. His areas of expertise are in the crypto macro space, and he also has a keen eye for global crypto developments, such as CBDC and DeFi, among others. Neeraj has a degree in electrical engineering from the prestigious Indian Institute of Technology in Mumbai.



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