The decentralized finance (DeFI) industry exploded between 2020-2022, with DeFI hitting $254.99 billion in December of 2021 by total value locked (TVL). With a jaw-dropping end of the fourth quarter last year, some crypto financial experts look towards this specific crypto space to continue to add digits to its value and predict DeFi finishing with an overall 10-fold growth in 2022.
So, what is DeFi and what makes it an attractive investment for potential investors and a smart choice for lendees? In this blog, we will tackle the basics of DeFi, what makes it a lucrative prospect, and give you our top picks for DeFi lending platforms.
What is DeFi?
DeFi is a challenger to the traditional lending industry in that it allows people to use cryptocurrencies and blockchain technology to make payments and transact business. This new decentralized system replaces traditional banks and credit card companies with straightforward peer-to-peer lending.
Instead of relying upon middlemen to approve, process, and help guide lending offerings found in traditional finance, DeFi lending platforms empowers individuals to transfer money directly among themselves, referred to as peer-to-peer networks. Anyone with a smartphone, an internet connection, and a crypto-based wallet can be a player.
DeFi gives you more control over your money, in this case—crypto. Crypto HODLers in it for the long haul can keep their wallets pumpin’ by lending their assets instead of dumping during a bear market. Doing so can earn tokens at great interest rates through the life of the loan term. All it takes is the right DeFi lending platform, a borrower, a few clicks, and you’ll watch those tokens hit your wallet as the interest pays out. Lendees profit from DeFi as well because loans can be taken without any fees typically found with more traditional routes of financing. What’s more—no complicated paperwork and no third parties involved from origination to funding. The lending process is streamlined through the Decentralized app (DApp) selected and the smart contract that is issued through the process. DeFi lending connects crypto borrowers and lenders with as little as just a few taps or swipes on the DApp.Â
How does DeFi lending work? Is it safe?
We mentioned it earlier, but at the core of this fantastic financial revolution is blockchain technology (our personal fave), DApps, and the smart contracts issued by it.
If you’re into the technical details, here’s how it works. A token holder uses a smart contract to send the tokens they want to lend into a pool. When tokens are sent to a smart contract, they become available for borrowing by other users. After that, the smart contract generates tokens (typically the platform’s native token), which are distributed to the lender automatically. In addition to the underlying assets that were given to the smart contract, the tokens can be redeemed at a later time.
Of course, all of this is undergirded by blockchain technology, which is touted as immutable and tamper-proof thanks to its decentralized nature and use of cryptography. Decentralization ensures that all data submitted within a particular blockchain ledger must achieve consensus with all users (usually thousands!) before it is validated. The distributed network of users, referred to as nodes, means there is no single point of failure. If one block’s data is attempted to be changed, all users must verify it or the changes are rejected. Once the data is accepted into the block, it remains a tamper-proof ledger. Although nothing is perfect, compared to centralized digital repositories where a single point of failure can and does occur, the blockchain promises to be a safer solution to storing and transferring digital value. Security is next to none within the blockchain.
Best Crypto Lending Platforms
Now that you’ve learned the benefits of DeFi lending for both borrowers and lenders alike, which DeFi lending platforms look promising? Here are 5 we are checking out.
1. Terra (LUNA)
We’re noticing that Motley Fool’s #1 pick is Terra (Luna). It’s a DeFi network built on algorithmic stablecoins, which some are predicting to be the new money of the nouveau riche. The value of a stablecoin is backed by a non-crypto commodity, such as gold, or a fiat currency, such as the US dollar. Unlike fiat-backed stablecoins, algorithmic stablecoins keep their value by utilizing smart contracts to generate tokens. Terra accomplishes this through its native LUNA token.
2. Aave (AAVE)
Being entrepreneurs ourselves, we like to pay attention to what Shark Tank Mark Cuban is doing. According to this article, we were delighted to read that 80% of Cuban’s newest investment projects are crypto-related. One historically held token in Mark Cuban’s portfolio is Aave. Aave is one of the leading and largest DeFi lending platforms available today. A recent Aave upgrade—V3— was designed to improve the platform’s user experience, risk management and capital efficiency, making this a worthy platform for crypto enthusiasts.
3. Uniswap (UNI)
The first true unicorn of the DeFi valley to be grabbed by its magical, glittery horn was Uniswap. To say it has exploded in popularity is an understatement. Its total value locked (TVL) has multiplied 137 times since February 2020, to $7.5B. It uses an Automated Market Maker (AMM) to ensure that ERC20 tokens have enough liquidity to trade on the site. This token gives investors complete control over their private keys and allows them to interface with other third-party wallets, lowering trade fees.
4. Trader Joe (JOE)
If you’re looking for a fairly new DeFi program to check out and you’re Avalanche-leaning, look no further than the new kid, Trader Joe. This DeFi is a one-stop-shop decentralized trading platform native to the Avalanche blockchain and the most popular DApp on Avalanche to date. Trader Joe’s dashboard offers Yield Farming, Staking, and Lending protocols in addition to a swap function. Users can connect to the exchange and explore its environment using a browser-based Web3 wallet like MetaMask.
5. Instadapp (INST)
What’s cool about this platform is that Instadapp integrates different dApps into one single application to manage all their functions. With this ingenious smart wallet, users can access other DeFi platforms like MakerDAO, Uniswap, and others, ensuring ease of asset management. Designed for the less tech-savvy, its interface makes it simple to use. The dashboard allows users to see all of their DeFi positions through one intuitive portal.
Looking specifically for DeFi auto loans? CarrDefi holds the keys.
Our blog wouldn’t be complete if we didn’t share about our own DeFi solution. Soon, car buyers will be able to take out crypto-based loans without relying on a bank or other financial institution. Carnomaly’s CarrDefi relies on a decentralized blockchain system where users can buy and sell loans and assets. CarrDefi combines the age-old automotive lending industry with the modern world of cryptocurrency exchanges. CarrDefi puts the user in control, allowing easy, peer-to-peer transactions in an automotive marketplace.
Summary
As crypto enthusiasts, Carnomaly always looks forward to what the future holds with new developments in the space. As with any new emerging technology and currency, choosing a platform that works for one person doesn’t always work for the next. We encourage you to do your own research and choose a DeFi platform that works best for your particular lifestyle and financial goals.