Decentralized Lending (2/5)

You may have heard of decentralized lending, or Defi lending in the crypto-space.

Decentralized Lending exists as a way to allow people to transact peer-to-peer without the intermediaries or arbitrary limitations of our banking system. For example, one of the common ways that DeFi is used today is through lending. If Person A wants to lend their Dogecoin to Person B, Person B would need to over-collateralize a token and put it into an escrow and Person A would be paid interest in locking up their tokens to provide a loan to Person B. This process is facilitated through a smart-contract, which is simply a piece of code.
Perhaps more simply explained:
Say you needed some Bitcoin or USD temporarily to pay some bills that are due before your next paycheck comes and you have a sizeable amount of Dogecoin sitting in your wallet.
You may not want to liquidate your precious Doge because you feel a pump coming and don’t want to miss out. Additionally, you don’t want to pay capital gains tax just to cover some bills, only to then re-enter into Doge once you got paid.
Using Defi lending, you can take a loan out for Bitcoin (as many vendors accept Bitcoin for bills), or even old fashioned USD, using your Dogecoin as collateral. If you don’t pay back the USD loan by the agreed upon time, the lender takes possession of your Dogecoins via a smart contract.

Decentralized lending works in a trustless manners and ensures safety among both counterparties. It removes the credit requirement preventing a lot of people from participating in our financial system and ensures fairness.

Written by Writers Room


Leave a Reply

Your email address will not be published. Required fields are marked *



The Old World of Centralized Finance (1/5)

Decentralized Exchanges (3/5)