DeFi lending has emerged as a viable alternative to traditional loans. There are certain things that one should consider before they start choosing DeFi lending platforms.
The growth of decentralized finance has strengthened the prospects of the implementation of blockchain in the development of DeFi loans and other fintech applications. Decentralized finance lending platforms focus on offering crypto loans with a trustless approach, where users can lock their crypto assets on lending platforms. You may also be interested in the the nft token list.
7 things that can change the way you look at DeFi lending platforms
While DeFi lending platforms have advantages for both lenders and borrowers, there are certain things one might reconsider.
- Different than traditional lending
While traditional lending is a time-consuming process, DeFi lending grants loans quicker as long as the borrower meets all the collateral requirements.
Accountability is the main advantage of DeFi lending. With the use of blockchain, on-demand records of all the DeFi loans can be maintained along with the rules and policies that granted the loan. This serves as proof of all the financial transactions when a decentralized finance loan is granted.
- Lending analytics
Lending analytics is another major benefit of the DeFi lending process as it can be utilized for optimizing funds. It also allows various DeFi lending platforms to gain insights into the sources of loans that can assist in improving the loan’s performance.
- Audit of code
One of the most important questions to ask when approaching a DeFi lending platform is whether the code has been audited or not. Since DeFi lending platforms do not have any intermediaries running operations and managing funds, the code itself should be flawless. This is why borrowers and lenders should always look at DeFi lending platforms where the protocols have been audited by recognized third-party DeFi audit firms.
- Presence of documentation
When searching for DeFi lending platforms, one should always look for those that can provide relevant documentation. Ideally, they should be able to provide a whitepaper, one-pager, guides, fee structure, frequently asked questions (FAQ), roadmaps, and more. The information can also be used to understand the nature of the project and assess its level of maturity and competence.
- Verifying the team
Some DeFi lending projects either don’t reveal their team or are governed by decentralized autonomous organizations. However one should always go for DeFi lending platforms that have publicly verifiable teams behind them.
- Reputable backers
Some of the best DeFi lending platforms are backed by reputable venture capital firms, blockchain-oriented funds, and other institutional investors which provide a sense of confidence among lenders and borrowers.
- Replacing human trust
DeFi can be called a bottom-up innovation that replaces human trust with math-based trust, legal enforcement with cryptographic enforcement, and paperwork with smart contracts.
- Considering risks
We are still in the nascent stage of DeFi lending. As a result, risks such as smart contract bugs, unsustainable high yields, and the volatility of cryptocurrencies exist.
- Greater law compliance
In DeFi lending provide greater consistency when issued loans. The rules are well-defined, records are well secured and nothing can be changed by a third party.
As more and more entities join DeFi lending, the capital accrued will only start to grow, which will improve the overall quality of the market.