How Peer-to-Peer Lending Works in DeFi
General - August 25, 2020
Decentralized finance (or DeFi ) is becoming an important part of the crypto world. For financial advisors, this is even more important because it relates to important concepts like lending and borrowing.
In this video we break down what DeFi lending is and how the peer to peer model works.
Lending is the most important function of a bank. This can be seen in the form of loans given by banks to individuals. Since the bank has a lot of money, in the form of other people’s deposits, one bank can give out various loans. But on an individual business, in order for one person to receive a loan, many people have to give up their deposits.
In the DeFi world, this lending is in the form of peer to peers. This measn that one person will receive the loan in the form of cryptocurrency. This cryptocurrency will be given by another person. Hence, peer to peer, or person to person. There is no bank acting as an intermediar, creating unecessary fees and friction.
The two participants will transact via a platform which will facilitate the transaction. This facilitation will be in the form of a smart contract that will automoate the decisions of the financial contract. One person will deposit a certain amount as collateral in crypto. He can then receive a liquidty and stable currency (like a stablecoin). If he fails to pay back the borrowed currency by a specific date, his crypto is sold for stablecoin to give to the lender.
This transaction creates immedate value to the borrower and gives recurring income to the lender. Lending pools are essential to the DeFi space, and pretty soon they will be common place across financial practices.
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