 Would it surprise you to know that something as seemingly tech-heavy and innovative as Defi lending is more closely related to ancient lending than modern financial systems?
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Think about it: what is DeFi lending if not a system for peer-to-peer loans?
DeFinanced Lending: What’s Old is New Again
Peer-to-peer lending has been around since the dawn of history. In fact, the concept began long before credit checks, third-party banks, or highly regulated and complex financial systems were ever around. It was all based on mutual trust between the borrower and the lender and, in many cases, a healthy dose of collateral and interest.
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A system of lending has always been a part of society. But like all systems, the holes in our current lending structures have become apparent over time. In our existing financial system, these holes were patched up with extensive regulation, high interest rates, and way too many intermediaries.
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Besides being complex and challenging to navigate, modern-day financial systems are plagued by many issues. But DeFi — or decentralized finance — is taking on the challenges of traditional finance head-on. It promises a brighter future for the world of borrowing and lending, and the financial industry at large is starting to pay attention.
DeFi Lending Addresses Inequity in Legacy Financial Systems
We’re just starting to understand how big a problem unequal access to financing truly is.
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And that inequity doesn’t just impact the victims of it. The inaccessibility of affordable financing stifles economic growth in the regions in which it is needed most.
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Traditional lending systems rely on third-party intermediaries and largely subjective analyses of a potential borrower’s worthiness (although these analyses are masked as objective by things like credit scores and trust ratings).
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When a centralized authority acts as the judge of whether or not a borrower is deserving of a loan, whether that loan is issued can be intentionally or unintentionally impacted by the authority’s biases.
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The system’s flaws lead to a stark contrast in who can typically receive a loan at an affordable rate, and in turn, who can open a business, purchase a car, a home, or build wealth.
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Across the globe, there are 1.7 billion people who are considered “unbanked.” This segment of the population is excluded from our existing financial system for reasons like lack of credit, lack of capital, geographic isolation, or even political and socio-economic oppression. As such, these unbanked people have historically been limited in their ability to seek financing.
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Still, two-thirds of those people own a smartphone. DeFi lending empowers anyone with a smartphone and a crypto wallet to access lending at competitive rates. It doesn’t discriminate based on location, education, ethnicity, gender, or socio-economic status.
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DeFi lending has the potential to open the doors of the financial system to a vast number of previously marginalized people, and that could mean big things for economic growth globally.
Defi Lending Means Big Things for Small Business
Small businesses are the backbone of the U.S. economy, and they employ 47.3% of the private workforce. Still, despite their importance, many small businesses struggle to secure lending at affordable rates. In the traditional financial system, the most favorable loan terms and the most competitive pricing is reserved for massive institutions.
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This means that small businesses are essentially underserved by an outdated financial system. Even small businesses with an existing relationship with a bank find that they need to rely on some of the highest-cost financing available. That includes things like credit cards.
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Beyond financing for operating costs and growth, small businesses are also slapped with expensive fees for every credit card transaction made by their customers. This is made worse by the numerous intermediaries required to process a transaction in the traditional financial model.
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DeFi, in essence, gives any user — like a small business, for example — access to the entire financial infrastructure regardless of the entity’s geographic location, credit, or wealth. It’s not surprising, then, that DeFi saw a surge in popularity during the COVID-19 crisis in 2020.
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When so many small businesses found themselves with tough decisions to make regarding whether to keep the doors open or shut down, DeFi lending was able to fill an important gap. The same can be said for individuals who may have been laid off as a result of the pandemic. DeFi lending provided a way to seek funding for countless startups that emerged from the pandemic.
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Between March and October of 2020, DeFi loans increased more than seven-fold, reaching $3.7 billion dollars. That number has continued to grow as more and more underserved businesses and solopreneurs become aware of the benefits of leaving the big banks behind when it comes time to fund a new project.
DeFi Simplifies the Lending Process and Tackles Current Issues Head-On
In addition to making affordable lending solutions available to more people and businesses worldwide, deFi lending also promises to streamline the lending process and improve upon some of the most fundamental issues the current financial system faces.
DeFi Means Improved Record-Keeping & Security
Sensitive data that is held by a centralized authority can be compromised, as many people have found out over the past few years in the wake of several high-profile data leaks. With deFi, financial data is stored as part of a distributed ledger that is validated by consensus mechanisms like Proof of Stake or Proof of Work. That makes it highly secure and resistant to data leaks and hacking.
DeFi Reduces Retention of Risk
DeFi lending means a movement away from retaining risk like credit and liquidity risk on middlemen’s balance sheets in the traditional financial system. Instead, borrowers are matched directly with lenders.
Privacy is Paramount
Blockchain technology operates in a largely anonymous way. That means that it’s extremely difficult, if not altogether impossible, to tie an individual user’s personal identity to their crypto wallet. It’s so anonymous, in fact, that the real identity of Bitcoin’s creator isn’t even known (though speculations abound).
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If the innovator behind blockchain as we know it isn’t traceable, you can be pretty sure that your information is secure as well.
Unlike Banks, DeFi is Not Timebound
When it comes to cryptocurrency and deFi, you won’t find any pesky bank holidays or limited operating hours. Transactions are constantly occurring, round-the-clock, round-the-globe, all year round.
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This means that you’re not limited to a bank or banker’s working hours when it comes to processing loans, like a CarrDefi loan for your next vehicle.
DeFi Lending is Borderless
Have you tried to make an international wire transfer lately? If you have, you’ve likely found that it’s expensive, complicated, and above all, slow.
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Considering the level of technology available to us in 2021, there is really no excuse for using the same antiquated processes for transfers that the banks have used for decades.
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Blockchain is borderless. Sending cryptocurrency from a user in one country to a user in another is as simple as sending crypto to your neighbor.
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For the time being, at least, deFi transactions are mostly free from the government regulations and currency controls that can make payments across borders so cumbersome.
The Application of DeFi Lending is Broad
The use of decentralized apps (DApps) to empower deFi lending and other deFi use cases are only limited by the imaginations of their creators. DApps enable a wide variety of lending services that can offer loans from just a few dollars to a few million.
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Additionally, DApps can also empower margin trading, global trade, payment processing, capital markets, and so much more. And it can often do it more efficiently and more effectively than the antiquated systems currently in place.
While there are plenty of fintech (financial technology) solutions that do not embrace blockchain technology, it’s clear that those that make the shift towards a blockchain-first structure will define the financial industry of the future.
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From its peer-to-peer origins to its modern-day, real-world applications, you might even go so far as to say that DeFi lending is both the ancient past and the future of lending.
To discover more about our own DeFi Lending solution for auto loans, visit CarrDefi.com.