In order to participate in the traditional financial system, a bank account is necessary. However, 1.7 billion people in the world do not have a bank account.
Borrowing funds from a bank or service provider is accompanied by numerous restrictions such as a credit rating, the provision of collateral and convincing the bank through numerous soft factors such as a business plan or experience in the sector.
Decentralized lending and borrowing of cryptocurrencies will remove almost all of these restrictions. Anyone can borrow a digital loan generated for a security deposit in USD. On the other hand, anyone is also able to offer a loan on the digital loan market and receive an interest rate for it. A bank account is not necessary. There is also no need for a custodian, because this is automatically taken over by the transparency of the blockchain.
Borrowing and lending as a DeFi application area
Decentralized lending, i.e. Borrowing by borrowers and investments by lenders is currently the most widely used DeFi application. The MakerDAO project in particular plays a decisive role here. MakerDAO is an Ethereum-based protocol that, among other things, provides the ability to lend or borrow a stable coin that is pegged to the US dollar.
Investment opportunities in the decentralized finance lending environment
In addition to MakerDAO, there are other decentralized options for using stable coins or other crypto values as part of lending to generate income. These include the compound protocol and dYdX. The decentralization of these service offers is characterized in particular by the fact that they are so-called non-custodial solutions, so the user has full control over his assets at all times and mostly interacts with an external wallet such as MetaMask or Ledger with the respective smart contract. Such offers can also be used without registration or other limitations, as no central provider can be subject to regulation. Of course, the legal framework for such projects is unclear, especially with regard to the regulatory point of view of the project initiators and development teams. In any case, there is initially no central body that vouches for the offers and that could be held accountable in the event of a malfunction or user error. The full confidence therefore lies in the smart contracts used.
The situation is different with centralized providers of blockchain-based assets in the lending environment. These are mostly custodial solutions, so the provider stores the assets for his customers and the user has to trust that the provider does not commit fraud on the one hand and is secured against external attacks on the other. In addition, there are usually comparable regulatory requirements as in the classic financial world. In contrast to decentralized offers, this enables the option to interact directly with legal tender such as euros or US dollars.
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