What are DeFi credits and how decentralized loans work? Is it better for borrowers and better for the economy?
Decentralized finance is a new trend that is constantly pushing the traditional economy out of the world agenda.
Miscellaneous blockchain networks proved their utility in lower fees, security and transaction speed. And DeFi platforms gradually become the link unifying all the best from the distributed ledgers.
But skeptics are reluctant to accept DeFi as a universal substitute for traditional financial instruments. They argue there is something that can’t be done properly on the blockchain. Such as credits, for example.
“Basic borrowing on blockchains is surprisingly easy, but credit becomes fragmented as users start to use multiple chains,” wrote Axios expert Brady Dale.
Nevertheless, decisions allowing cross-chain DeFi credits already exist.
Let’s take a look at some of them.
Pay to lend or DeFi credits in action
The most advanced DeFi credit protocols provide users with lending after their deposits.
One of them is the Prime Protocol, which allows users to deposit their assets and take out loans against them. This allegedly allows users to leverage a portfolio up to 11x.
Sounds great, but we have to confirm it yet in reality.
Prime Protocol will, supposedly, mint a new stablecoin called PUSD with the help of loans. PUSD is not a fiat-backed like the most popular stablecoins Tether or USD Coin.
PUSD will be a stablecoin supported by the user’s deposits. Thus Prime Protocol tends to make trading on margin far easier for users who want to stay decentralized.
So imagine having your deposit backed by stable cryptocurrency. Not bad for exotic DeFi credits, huh?
According to the project’s authors, with Prime a user will be able to make a deposit on one chain and borrow on any other that has Prime running as well. All that will be possible with one product as all collateral deposited in Prime will count toward one big credit line.
Simply put, Prime Protocol’s users can deposit many different kinds of assets and borrow against all of them at once.
Aave V3 protocol
The largest DeFi money market Aave recently released its V3 protocol, which also allows users to deposit on one chain and borrow on another.
The release of V3 makes the Aave Protocol one of the most advanced, secure, and efficient DeFi protocols across the ecosystem, the company claims.
Taking into account how may users have already chosen Aave, it might be true.
The most important V3 feature is the Portals system, which facilitates cross-chain transactions. Basically, it allows assets to seamlessly flow between Aave V3 markets over different networks. These networks include Ethereum, Polygon, Avalanche, Solana, Fantom, Harmony etc.
So how does it work?
- At first you have to deposit some assets on Aave protocol.
- Then you can those assets as collateral to borrow the assets you need.
- The platform also gives you an opportunity to get passive income by using your deposits for market borrowing demand. Sounds like a traditional bank deposit, but on the blockchain.
- You don’t need any documents to get the loan, that’s the main difference from usual banks
Your Aave funds will be are allocated in the open-source smart contract.
You can withdraw it from the pool on-demand or export a tokenized version of your lender position with aTokens.
The aTokens’ value is pegged to the value of the corresponding supplied asset at a 1:1 ratio. Of course, aTokens can be moved and traded like any other cryptographic asset on Ethereum.
Who might be interested in DeFi credits or decentralized loans?
The main purpose of DeFi is to give people more financial freedom. DeFi credits are the way to do it.
Using all merits of blockchain – scalability, security, smart contracts etc – DeFi institutions are able to offer users all kinds of previously unseen ways to loan money.
With a decentralized loan, you’re not dependent on having access to credit systems. And you can customize the duration and the cost of the loan however you want.
“No centralized loan providers offer this kind of advantage in a trustless fashion,” a co-founder of decentralized crypto asset management platform Betoken Guillaume Palayer said.
Some of the DeFi platforms already offer instant loans in over 45 fiat currencies.
So if you have crypto assets, you can immediately borrow cash and get it straight to your local bank account. There are even crypto credit and debit cards, supported by Visa and MasterCard (cryptolife.report will soon write a separate article about this stuff).
Besides DeFi credits are interoperable.
For instance, you can take out a DAI loan from MakerDAO and convert it to Ether. There are endless similar possibilities with different platforms. And it’s worth trying at least one of them.
The bottom line: you can use your crypto assets as a collateral to loan other kinds of crypto and increase your portfolio or get cash straight to your bank account into fiat currency. It’s easier and faster than visiting your bank where some guy will ask you for your credit history and even the diploma and the list of your physical assets.