With the rise of decentralized finance (DeFi) and lending protocols, users have been left with an unanswered question: What are DeFi Lending Platforms? DeFi lending platforms have promised to bridge the crypto-to-traditional banking gap.
As a result, they serve as a new financial service while also meeting the needs of blockchain and cryptocurrency mass adoption. DeFi is also known as open finance because it pioneered the open banking movement, in which individuals do not need a major party to obtain financial services.
Through DeFi loans, any individual can quickly and easily take out a loan without going through all the hiccups of having to disclose their identity to a third party, financial records, or delays. This article explains What are DeFi Lending Platforms, DeFi lending vs staking, and DeFi lending risks.
DeFi Lending Explained: What are DeFi Lending Platforms?
The goal of Defi lending platforms is to provide crypto loans in a trustless manner, that is, without intermediaries, and to allow users to list their crypto coins on the platform for lending purposes. Borrowers can take out loans directly through the decentralized platform.
You can check out this great article on DeFi Lending Protocols.
Besides, the lending protocol allows the lender to earn interest. Among all of the decentralized applications (DApps), Defi has the highest lending growth rate and is the most prevalent contributor for locking crypto assets. Here are some of the top DeFi lending Platforms:
Market Cap: 804.38M
Aave, and its predecessor ETHLend, were founded by Stani Kulechov. At the time, he was frustrated at the lack of lending applications on Ethereum — and his project was built before decentralized finance even existed.
Aave is an open-source, non-custodial Ethereum protocol that enables the creation of money markets. Although it provides other services, lending and borrowing are it’s most popular. It, like many other DeFi lending platforms, provides a dual DeFi token model: aToken and LEND.
The platform, which debuted in 2017, is the market’s most popular DeFi lending platform. LEND is the governance token, while AAVE is an ERC-20 token where lenders compound interest. Aave provides a wide range of loans and lending services, including uncollateralized loans, “rate switching,” Flash loans, and specialized collateral.
The interest rate varies according to the token deposited. Certain stablecoins, or dollar-pegged tokens, currently provide the best returns on the platform, with returns averaging around 12%.
Aave is one of the DeFi lending platforms that support many assets including Basic Attention Token (BAT), Dai (DAI), Ethereum (ETH), Kyber Network (KNC), Aave (LEND), ChainLink (LINK), Decentraland (MANA), Maker (MKR), 0x (ZRX), and Synthetix USD (SUSD) amongst others.
Market Cap: $556.72M
MakerDAO, the first entity within the larger Maker ecosystem, was founded in 2015 by Rune Christensen, a Sealand, Denmark-based entrepreneur.
Maker is a unique Defi crypto lending platform that allows borrowing only DAI tokens. DAI is a stablecoin whose value is pegged to US dollars. Anyone can use the Maker to open a vault, lock in collateral like ETH or BAT, and generate DAI as a debt against that collateral. It encourages users to participate in operational earnings through governance fees, which act as interest rates for the network.
DAI can be borrowed up to 66% of the user’s collateral value. If the vault falls below the fixed rate, it becomes subject to a 13% penalty and liquidation to bring the vault out of default. At a 3% discount, liquidated collateral is sold in an open market.
MKR, Maker’s other token, serves as the last line of defense in the event of a black swan event. If the collateral value begins to fall, MKR is minted and sold on the open market in order to raise more collateral, thereby diluting MKR holders.
Maker’s Oasis Portal is the most popular place to use MakerDAO, as it allows you to open, manage, and review vaults, deposit DAI into DSR (DAI Savings Rate), and view updated stats on the entire Maker system.
Market Cap: $280,98M
Kava was founded in 2018 by Brian Kerr, Ruaridh O’Donnell, and Scott Stuart. Kava is one of several emerging decentralized finance (DeFi) projects. However, while most DeFi projects run on Ethereum, Kava is built on Cosmos, which its team claims add additional functionality.
Users of its platform can borrow loans denominated in USDX, a cryptocurrency pegged to the value of the US dollar, by locking cryptocurrencies into smart contracts on Cosmos.
Kava uses a Cosmos feature called zones to manage the crypto assets it accepts, which are then run in programs on separate networks. This allows the project to expand the number of crypto assets available to borrowers, including XRP, BNB, and BTC, among others.
Users receive weekly rewards in the form of KAVA, Kava’s cryptocurrency, by collateralizing cryptocurrencies to mint USDX. The total amount of KAVA received by users is determined by the type of collateral used and the amount of USDX minted. Minters who use BNB as collateral, for example, receive a share of the 74,000 KAVA that the platform issues weekly.
Market Cap: $262.71M
Compound was founded in 2017 by Robert Leshner and Geoffrey Hayes, both of whom had previously held high-level positions at Postmates, an online food delivery service.
Another popular, openly accessible smart contract built on the Ethereum blockchain is The Compound. It enables both borrowers and lenders to bind their crypto assets to the protocol.
Unlike other DeFi lending platforms, it allows the tokenization of assets stored in its system using cTokens. Users can trade assets they have locked on the platform thanks to tokenization.
Consequently, when you deposit ETH, you get a cToken, which can be used as collateral. The COMP token, on the other hand, is its DeFi token. It does, however, support a diverse set of nine Ethereum-based assets, including BAT, DAI, SAI, ETH, REP, USDC, WBTC, USDT, and ZRX.
Its DeFi lending and borrowing rates vary depending on the supported currency. Borrowing and lending rates on the platform are 2.63% and 0.86% for a 30-day period as of December 6, 2022.
Market Cap: $99.63M
The founder and CEO of DYDX is Antonio Juliano, an experienced programmer with a background in blockchain technology.
Margin trading, options, and derivatives, which are normally found in fiat markets and are common in traditional investments, were introduced to the blockchain space by dYdX. Users can trade, lend, and borrow ETH, DAI, and USDC on the platform.
It also offers cross-margin trading and isolated margin trading, as well as using a perpetual market contract of BTC/USDC with 10x leverage. The platforms’ loans are based on 125% collateral and 115% self-liquidation.
It does not have a native token, unlike many other DeFi lending platforms, and thus charges trading fees in the supported tokens. As of December 6, 2022, the platform’s lending and borrowing rates are 0% and 0.02% for 30 days, respectively.
DeFi Lending vs Staking
You can also make money as a crypto holder by lending your crypto and collecting interest from people who take out crypto loans. Crypto lending isn’t as widely available as crypto staking, but it can be a simple way to earn money in places where it is.
Some cryptocurrency exchanges provide lending or “earning” options that can be accessed by depositing funds into an account. You could also make money by lending your cryptocurrency through a decentralized finance (DeFi) lending app like Compound or Aave. To use one of these, you must first purchase and add a compatible coin to a cryptocurrency wallet, then deposit the funds into the app.
Rather than connecting borrowers and lenders directly, as some peer-to-peer lending platforms do, crypto lending functions similarly to savings account at a bank. You deposit or lend your money into a pool of funds from which others can borrow, and then you can withdraw your loaned amount plus your interest portion later.
In short, staking is ideal for long-term crypto investors seeking consistent gains while minimizing risk. It entails locking up your cryptocurrency for a set period of time in order to generate passive income from it. Staking rewards are measured in terms of annual percentage yield (APY).
Staking generates income because you are rewarded for pledging your cryptocurrency to secure the blockchain network. Staking is similar to mining in that both miners and stakers dedicate computing power to the blockchain. Both are rewarded with additional cryptocurrency.
You can check out this great article on How Proof of Stake Works.
The process for staking is pretty simple. Find a platform that supports staking, like an exchange or wallet. Then choose how much you want to stake and for how long, and you’ve got passive income. Finally, staking is only available for coins that use a proof-of-stake (PoS) consensus mechanism.
DeFi Lending risks
DeFi lending offers a trustworthy way for cryptocurrency owners to generate passive income. However, it’s also crucial to be aware of the main risks associated with DeFi lending before you start lending. Some of the DeFi risks include:
DeFi rug pulls
Although DeFi appears to be promising, the ecosystem lacks clear regulations. As a result, investors must have faith in the platforms through which they intend to purchase tokens or lend their assets. However, investors may fall victim to cyber breaches in the form of “rug pull” schemes. So do well to investigate properly before depositing your funds on any platform.
The volatile nature of crypto tokens is the primary cause of the impermanent loss. For the DeFi lending process, investors are required to lock their assets in liquidity pools, and any change in asset price after depositing them in the pool results in an impermanent loss.
The impermanent loss may also result from the fact that the DeFi pools rely heavily on arbitrage traders to align the token prices in the pool with the current market value.
You can check out this great article on Impermanent Loss in DeFi.
Flash loan attacks
Flash loans are a new type of DeFi loan that does not require any type of collateral. This is also referred to as DeFi lending without collateral. In the conventional banking space, there are two types of DeFi crypto loans: secured and unsecured loans.
Secured loans are larger and require specific collateral, such as real estate, investments, automobiles, or other large assets. Banks then assess the client’s credibility throughout the loan process by utilizing tools such as credit reports and scores.
Unsecured loans, on the other hand, typically involve the disbursement of a smaller sum of money, implying a DeFi loan without collateral. Malicious attacks on flash loans can pose a significant risk in DeFi lending. Few agents can also use flash loans to exploit the defending protocols for personal gain.
Decentralized lending platforms are at the heart of the decentralized finance industry. That is, the best DeFi lending platforms on the market allow you to earn an attractive APY on your idle tokens. In turn, the tokens will be lent to those who wish to borrow funds without going through a centralized party.