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Introduction to lending

Defi lending allows lenders to earn interest for lending their crypto assets providing a chance for long-term investors to earn high interest rates. Users borrow and lend cryptocurrencies for a fee or interest through a DeFi lending DApp or a cryptocurrency exchange. When you return your loan plus a fee, your capital is unlocked.

Defi lending offers a censorship-free environment, meaning there is no preferential treatment while ensuring immutability. Defi lending platforms offer margin trading options and aim to offer crypto loans in a trustless manner, without the use of intermediaries and allow users to enlist their crypto coins on the platform for lending purposes.

How Lending Works: Benefits and Risks Analyzed

Defi lending benefits both lenders and borrowers:

  • The borrower initiates the process by depositing crypto assets as collateral
  • The site disburses loans through self-regulating smart contracts
  • The borrowers pay a different interest rate for borrowing cryptocurrencies
  • The interest the borrowers pay goes to the lenders

Benefits of DeFi Lending

  • Better borrowing speed/loan origination speed

    • The lack of third-party involvement streamlines processes and fast-tracks the loan approval process. Backed by cloud-based services, analytics for fraud identification, detection and machine learning calculates for optimum loan terms and risk factors.

  • No intermediaries

    • Smart contracts are autonomous protocols that activate without any oversight.

  • Permissionless & Transparent

    • DeFi platforms, with \no geographic limitation or credit history requirement, are transparent and open ecosystems where anyone with a crypto wallet can join by meeting the platform’s requirements.

  • Greater consistency in lending decisions

    • Rules describing credit policies guarantee consistency in lending decisions. Variations in evaluating applicant attributes and structuring deals by underwriters are eliminated.

  • Immutability & self-custody

    • The decentralized architecture of blockchain provides a tamper-proof system for data coordination, enhancing security and auditability. This empowers users with robust custody of their assets and comprehensive control over their data.

Risks

Lending involves financial risk. Make sure you understand the risks involved and know how to manage them.
Risks include liquidations, smart contract exploits/hacks, software risks and impermanent loss.
"Before borrowing or lending, understand that you will lose custody of your coins. This removes them from your control and reduces your liquidity. Take note of all the terms and conditions of the loan to understand when you can access your funds and any fees involved." Binance Academy
Read more about potential risks here.

More resources:

Coinbase: DeFi Investment Risks
Binance: What Is Crypto Lending and How Does It Work?