Traditional vs. DeFi Lending and Borrowing Software: A Comparative Analysis

Decentralized Finance (DeFi), the new age finance claims to be exceptionally better than the age-old traditional finance. The existing traditional borrowing and lending process is pretty much centralized. As a result, it is exposed to issues like third-party involvement, insider jobs, thefts, and hacks. DeFi protocols, on the other hand, offer complete transparency in the process of borrowing and lending. Moreover, it involves no third-party and facilitates a straightforward borrowing and lending process. As the DeFi protocols are backed by blockchain, immutability is guaranteed.

How does DeFi Lending and Borrowing software work?

At the core of a DeFi lending and borrowing software is a DeFi protocol. This enables the creation of a decentralized marketplace of lenders and borrowers. Moreover, the protocol uses smart contracts so that the users are always in complete control of their funds. A DeFi development company can help build a DeFi lending and borrowing platform where long-term investors can lend their assets to borrowers in a secure way and earn higher interests.

• Firstly, anyone can become a lender on a DeFi platform. Here is what the complete process of lending and borrowing looks like on a DeFi platform.
• An individual who wishes to be a lender uses the DeFi protocol and deposits his tokens into the money market.
• The assets are basically sent to a smart contract that acts like an automated third-party. Once a smart contract is set up, these tokens can be borrowed by a borrower.
• The interest payouts are also programmed in the same contract that was set up while sending the tokens to the money market.
• The DeFi protocol mints the interest tokens and the lender receives the interest tokens automatically. He can choose to redeem them later.

A user who borrows the tokens is required to provide some kind of crypto guarantee. It is made sure the loans are always over-collateralized. This protects the lender’s capital in the setup. So basically, at any given point in time, the value of the collateral is higher than the loan.

What benefits do DeFi Lending/Borrowing Provide?

Undoubtedly, DeFi lending applications are far more superior to the centralized traditional financial setup. That is because the former thrives on a peer-to-peer setup that is driven by automated smart contracts. Driven by blockchain, DeFi lending and borrowing software promises transparency, security, and immutability. Moreover, it offers lenders interest-bearing accounts where they can maximize their earnings. Interest-bearing accounts can help the users to increase their earnings when compared to traditional savings account exponentially. Certain DeFi development services also enable the development of DeFi platforms with built-in crypto wallets where users always retain the custody of their crypto assets. Apart from these, the DeFi platforms offer innumerable benefits. The most noteworthy ones are:

• Permissionless, transparent and immutable lending system:Anyone who owns any amount of crypto assets in a crypto wallet can become a lender on the DeFi platform. In a traditional financial setup, lending facilitators provide no transparency to the users. However, as the DeFi platforms are driven by blockchain, they offer complete transactional transparency. Along with that, these platforms are inherently tamper-proof that makes them highly secure and easily auditable. Interestingly, these systems are borderless.

• Users retain the asset custody: Most of the DeFi platforms use Web3 wallets. This ensures that the platform users are in complete control of their assets.

• Automated execution : Instead of a third-party, the DeFi platforms are driven by programmable smart contracts. This promises automated execution of lending contracts and interest pay-out contracts.  

• Faster lending process :A DeFi platform eliminates all the paper-work from the lending process. Also, there is no need for underwriters in this setup. This works together to speed up the lending process and eliminate the chances of frauds and delays.
• Strategic lending : The lenders can analyze the data generated on the platform to devise different lending strategies. They can monitor the loan applications, choose the borrowers and improve their asset portfolio to meet the demand of the borrowers and maximize their returns.
• Interest maximization: The interest rates on these platforms are dynamic. These rates are calculated using the ratio of supplied vs. borrowed tokens in a particular market. As the lending rate of these money markets on DeFi platforms is driven by market demands, this creates a more democratic lending market.

If you are planning to build a DeFi lending platform, Antier Solutions can help. We provide white label lending software to accelerate deployment, helping you to quickly launch your software. In addition, we offer customized DeFi development services to build a new lending platform from the ground up.

Schedule a free demo of our white label DeFi lending platform or connect with our subject matter experts to share your needs for a custom lending platform to be built from scratch.