What are DeFi loans?

How do DeFi loans work?

Crypto assets sitting in a wallet don’t accrue interest. The underlying value may increase or decrease, but you’re not earning anything for holding that particular cryptocurrency. This is where DeFi loans come in.

What makes it so special?

DeFi offers the same products as brick and mortar financial institutions (lending, borrowing, trading, investing, etc.), but uses blockchain to do so with additional benefits:

What are DeFi loans?

How are loans made?

Using a smart contract, found on projects like ethereum allows users to pool their assets and distribute those assets to borrowers with the rules of the loan written into the contract.

How does a DeFi loan work?

When a borrower wants to take out a loan, they have to offer something more valuable than the amount of the loan. That means they need to deposit via a smart contract an amount of currency that is at least of equal value to the amount they’d like to take out. The collateral can be in a wide variety of currencies however. So if you want to borrow one bitcoin, you’d need to deposit the current price for one bitcoin in DAI, for example. Or 11,296 DAI.

What are the Challenges?

Borrowers are often required to over-collateralize their loans, as shown in our previous example with MakerDAO.

The Future

As DeFi continues to evolve, we’re going to see decentralized systems attempt to make all of these services as good as their brick and mortar cousins. After all, these services are available to anyone with an internet connection, meaning anyone could buy, and loan crypto.

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