Lending and borrowing within the crypto markets have really increased during 2020 with many decentralized finance platforms offering new ways to create passive income from your crypto holdings. Cryptocurrencies have been around for over a decade and offer a decentralized peer-to-peer exchange of value, but monetary exchange is only one element of an entire financial ecosystem that rivals our current complex system of derivatives, options, shares, etc.
As blockchain technology becomes increasingly accepted in the mainstream, solutions for more in-depth and complex financial products and services have become more popular and trusted. It’s difficult not to speak of the 2020 DeFi boom when talking of decentralized financial systems. The speed at which these blockchain projects (mainly Ethereum) have grown has been mind-blowing with millions of dollars locked in on Defi platforms by the end of 2020.
Both lending and borrowing are familiar concepts, yet decentralized financial systems differ from current centralized models. One of the most obvious differences being that in a decentralized system, there are no intermediaries and everything is run in the trustless peer-to-peer system.
The middle man, for instance, a loan agent or bank, is no longer required as they once were since the contract for the loan is now written into a smart contract. Instead, decentralized platforms have been built to enable users to borrow and lend directly to one another.
With a simple action, a borrower can quickly access lenders worldwide at competitive rates. The same is true for lenders who can safely issue loans through a decentralized and trusted third party. Peer-to-peer lending and borrowing offer a much more transparent system than with non-blockchain-based systems, with all transactions recorded and visible.