In the space of decentralized finance (DeFi), one of the most eagerly sought-after development protocols is Lending / Borrowing. This is because of its unique approach in the field of the banking industry that gets rid of all the existing shortcomings. The profit reaped in DeFi lending (or) borrowing protocols is also huge.

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With so many affirming statements about DeFi's success and it's potential future, let's quickly witness it for ourselves by exploring the mechanism employed in DeFi protocols and its business prospects.

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Challenges in Conventional  Lending/Borrowing

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Consider you wish to borrow a sum of amount from a nearby bank. Can you imagine the complications involved in the process?

From manual filling out of forms to credit score check, the time it consumes, and the difficulties faced are massive. In some cases, certain banks even misconduct with their customers with a discriminational approach.

 

The alternate option to banking organizations is private lending and borrowing. Since that cannot be regulated and the parties are mostly untrustable, loanees often encounter conflicts.

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Lending and borrowing practices are essential to either maximize our income or meet our urgent demands instantly. But since the existing system is rigged with flaws, is there a way out to borrow and lend funds fast with proper security?

 

Well, we've got a way out. And that's decentralized finance (DeFi).

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Role of DeFi in Lending/Borrowing

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DeFi's immediate success is credited to its architecture and system of work. The decentralized nature of DeFi protocols offers transparency in every process involved and helps us gain ownership over our funds. In simple words, unlike the banking sector, there's no third-party involved.

DeFi plays a phenomenal role in lending and borrowing protocols. Here's how it works for lenders and borrowers.

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Who are the Lenders

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Users can lend their crypto-assets to any borrower irrespective of their race, nationality, or status. Based on the amount lend, lenders earn respective interest from the borrower. Also, in some lending/borrowing protocols, they also earn additional DeFi tokens for lending the same.

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Who are Borrowers

 

Borrowers who wish to borrow digital funds are required to deposit their crypto-assets as collateral. This collateral is usually higher than the sum borrowed due to the volatile nature of the crypto market. However, this is solved by stable coins that are pegged to a constant value. Thus borrowers can borrow crypto funds. Their collateral is subjected to liquidation if they fail to repay the borrow the amount.

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If the system is decentralized, without any middle-men, how exactly are these activities executed?

Smart contracts:

 

Yes, smart contracts are pre-coded conditions that execute functions based on the conditions. They collect, deposit, transact and liquidate funds based on the pre-set criteria. Smart contracts cannot be altered once set. Thus, the entire system is automated and made secure.