What Is DeFi Lending And Borrowing?

Access to capital is a huge problem for many. If you have the riches of this world, you can unlock this very easily. Except you are into DeFi Lending And Borrowing.

For the average person, you have to turn to family and friends for the capital you need.

Thankfully, DeFi has offered a solution to this problem. What do I mean?

Let’s say you have this amazing business idea and you need some capital to set it up, you can now have access to loans with your crypto assets as collateral. Your crypto assets remains untouched and continues to grow.
This comes at some risks however.
For example, you could have issues paying back the loan.

We will not cover all the risks involved in this article however.

For now, let’s look at an example of a DeFi Lending And Borrowing protocol – AAVE

AAVE is a decentralized money market protocol. As a user of this protocol, you can lend or borrow some 24 different crypto assets. This puts AAVE as the top protocol for DeFi Lending and borrowing.

As a lender, you provide liquidity by depositing one of the allowed crypto assets into the available pending pool which earns you some interest. It is from these pools that borrowers get money from and pay interest in return.

Here are some of the features of AAVE:

1: Rate Switching: This allows borrowers to switch between stable and variable crypto assets.
2: Flash Loans: This feature allows borrowers to take up loans with no collateral, if the user repays the loan and interest within the same block of transaction.
A flash loan requires some good level of capital, and mainly profitable for Arbitrageurs.

3: Collateral Swap: Borrowers can swap their collateral for another asset. This makes sure that loans do not go below the minimum collateral ratio, thus resulting in liquidation.

Aside from AAVE, there are other protocols like Compound, Maker, Cream Finance and soon Wault Finance that offers DeFi Lending And Borrowing.

Before you deposit your assets in a pool to earn interest, or borrow, be sure to consider how safe the protocol is.

Other risks to be worried about are contract bugs and hackers possibly exploiting the protocol.

Above all, be careful how you manage your collateral ratio so you don’t lose your funds.

While DeFi is still young with very high risks, the option of being able to lend or borrow has offered so much more benefits compared to traditional finance systems.

The interest rates for lending are higher
You don’t need a kyc before taking a loan
No need for a credit history before a loan is granted
It is easily accessible by all.

However, be fore to DYOR before interacting with such protocols

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