With the rise of decentralised finance (DeFi) lending platforms, the financial environment is undergoing a significant shift. These platforms use blockchain technology to deliver inclusive and accessible loan solutions that cut across geographic boundaries and traditional financial institutions.
DeFi is comprised of many elements that give a sense of great potential to global banking as we know it. This is something that has excelled in its popularity, considering the decline in confidence of central banks, especially considering some of the banking blunders such as the 2008 financial crisis.
Blockchains for the win
The nature of the blockchain is to allow everyone to see everything, with no chance of behind-the-scenes actions being taken that can affect investors globally. This alone gives users a further sense of security.
Blockchain technology has already been recognised as being useful and secure for both users and businesses to use. Currently, blockchain technology has already been approved to be built on for the online casino market, where users will play a host of games such as online blackjack, poker, and video slots via blockchain tech. As they select a game version, as well as what promotion to take advantage of, users can deposit their funds in multiple cryptocurrencies, diving into the thrilling games in an instant.
The Malta Gaming Authority has already approved blockchain technology to be used as the framework for online casinos to use, which would essentially give them a much more straightforward quality assurance process and also give many casinos the freedom to innovate on the blockchain.
Giving borrowers and lenders more freedom
DeFi lending platforms give borrowers access to finance without the need for credit checks or collateral. Individuals can use this frictionless borrowing procedure to fund campaigns, investments, or problems without the usual obstacles.
Lenders, on the other hand, can earn interest by providing liquidity to the platform, essentially becoming a part of the lending process and contributing to initiatives to increase financial inclusion.
Smart contracts and automated processes
DeFi platforms use smart contracts as self-approved code in order for processes to work as smoothly as possible. Using smart contracts allows for processes to be completed via automated code, improving reliability and giving far more secure results in a much shorter time frame.
There is still some work to be done in terms of improving smart contracts to a level where minimal to no errors occur. While these errors don’t cause much stress on a transaction of funds alone, more risk is taken when assets are included in transactions, and if on a larger scale, investors can be put at risk.
Luckily, smart contracts have been used on a number of chains for over 2 years already, and there is a steady path to improving scalability and reliability.
Yield farming and liquidity mining
The concepts of yield farming and liquidity mining is unique to DeFi lending platforms. Users can receive incentives by contributing liquidity to the platform, thereby increasing the liquidity and stability of the loan ecosystem. This encourages users to actively contribute to the platform’s progress.
With the traditional banking system, this process would be seen as far more risky. Any central authority that is solely responsible for large amounts carries a mass amount of risk, however, with decentralised systems for yield farming and liquidity farming, the risk is far lower and brings much more potential for users.
DeFi has many more challenges ahead
While DeFi lending platforms provide numerous advantages, difficulties remain. Security flaws, the unpredictability of regulations, and the possibility of smart contract errors are all issues that must be addressed carefully. As the technology improves, joint efforts to overcome these difficulties will be critical for the DeFi lending ecosystem’s long-term growth.
What are the main pros and cons of using DeFi?
Pros
- Accessibility – Due to geographical restrictions, there are large parts of the globe where users are unable to lend and borrow. DeFi removes this barrier and gives everyone the opportunity to take part in the revolution
- Transparency – Using blockchain technology, all users are able to track all transactions ever made, as they are all registered in blocks, giving them full power to view all transactions.
- Security – Due to the simple fact that users’ funds are stored in their own wallets, removing the risk of centralised databases being hacked and giving full power to the user.
- Reduced costs and waiting times – As DeFi does not use any intermediary middlemen, both costs and waiting times are drastically reduced.
Cons
- Regulation uncertainty – While many geographical locations have framework in place, there are still many areas where DeFi and blockchain technology are not yet regulated. This uncertainty always carries risk, despite the bright outlook as of now.
- Risks of smart contracts – While the premise of smart contracts works well, there is always an element of risk; small development errors can lead to large scale errors and losses.
- Scalability – In the earlier stages of DeFi, there are not too many users that would affect the pace at which transactions can go through, however, with more users and/or wider scale adoption, further risk of slow waiting times for transactions appears.
