DeFi Borrowing (DeFi Loans)

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  • DeFi Borrowing (DeFi Loans)

Here’s the tl;dr:

  • You can use DeFi loan platforms to borrow crypto assets
  • The loan can be anonymous, meaning you don’t need to prove identity
  • In place identity verification, loans are secured using underling crypto assets as collateral

So you want to take out a loan using DeFi?

As some of our readers might already be aware, taking out a loan or borrowing fiat funds in the traditional finance world can be a real pain point. Lenders require borrowers to jump through countless hoops to verify who they are, what they do and – ultimately – whether or not they’re going to be able to pay back the money they borrow.

In some cases, this is fine. However, for many individuals, certain circumstances can make the whole process very difficult or even impossible.

Enter DeFi loans

The concept of DeFi borrowing is et core exactly the same as its Fiat alternative.

An individual wants to borrow some capital. They agree with a lender how much to borrow and how much it will cost them to borrow said amount (the cost, here, is the interest rate on the loan). They also agree a loan term (how long it will take to pay it back) and, most likely, will offer some assets up as collateral.

With DeFi loans, the process is pretty much exactly the same, it just doesn’t include a middle man.

A DeFi loan or Defi borring platform will connect lenders and borrowers, with the intricacies of the arrangement (term, interest rate, collateral requirements) all dictated and coordinated through smart contracts built on the Ethereum blockchain.

How much and what cryptos can I borrow?

This all depends on how much collateral you want to put up and what platform you choose to borrow through. Some of the more well known lending platforms (Compound, Maker, for example) offer a wide range of cryptos at super competitive rates – the rates are generally dictated by supply and demand for a particular asset.

Can I get an example?

Sure.

So imagine you want to borrow $1,000 equivalent in USDT. You’ve got $1,000 worth of DAI that you can use as collateral, and you lock that into the Compound platform so that the company can be sure that if you renege on the interest or the capital borrowed, it’s covered at their side. You agree (via a smart contract) to borrow the approx 1,000 USDT at a 1.3% annual interest rate, for 12 months.

Over the 12 months, you’ll pay the 1,3% and then at the end of the term you’ll deposit the initial capital ($1,000) to settle the contract and release your collateral.

Simple!

Check out some of the more popular DeFi borrowing platforms here.