Here’s the tl;dr:
- Lending is one of the primary functions of decentralized finance technology.
- Anyone who holds crypto can use a defi lending platform to leverage their assets
- Lenders earn interest on whatever they lock into a defi lending platform
So, what is Defi Lending?
While the technology that underpins all of this is pretty complicated, you don’t have to be a tech or blockchain wizard to utilize the services these platforms offer. In a nutshell, if you’ve got any crypto assets, you can lock them into at DeFi lending platform and lend them to borrowers.
Why would I lend my crypto to someone else?
To earn interest! Just as you would if you loaned someone or some entity your fiat currency, you can earn interest on the crypto assets you loan out to others in the digital space. Think of it like a bank account. With traditional fiat, you put your money in an account and your bank or financial institution lends it out to others for mortgages, business loans, that sort of thing.
The DeFi version of this transaction is no different in concept, it just utilizes digital assets instead of fiat and uses smart contracts to replace the middle men – in this example, the bank.
Can I get an example?
Sure, so you’ve got $1,000 in crypto somewhere, say Coinbase (a popular crypto exchange). You want to earn interest on this crypto instead of have it just sitting in your account, so you decide to lend it to others through a DeFi lending platform.
We’ll use Compound as an example, since this one of the more popular platforms on the market today.
First up, you connect your Coinbase wallet to Compound. You then decide how much of this $1,000 you want to lend out – for this example let’s assume all of it.
You lock up the funds in the Compound ecosystem, and decide what asset you want to lend in – Ether, DAI, Tether, whatever. Once your funds are locked, Compound will supply borrowers with assets using your funds as collateral, and you’ll earn interest on the funds you locked up.
A smart contract dictates the predefined terms of the arrangement, meaning there’s no room for human error and you know exactly what to expect going into the transaction.
When you want to unlock your funds, you can do it instantly through the platform, send them back to your Coinbase account and use them for whatever you choose. Simple.
Something to keep in mind.
This all sounds fantastic, and in many ways it is. But there are risks, of course. Whenever you lock your funds into a platform you’re assuming that said platform has a solid security foundation and that there are no bugs that could jeopardise the contract. Compound is audited regularly, so it’s one of the safer platforms to use, but don’t assume there is zero risk.