In the previous article, HyperBC Blogs introduced that traditional finance sectors like World Finance Payment. It provide diverse lending services catering to users’ convenience and needs. Yet the revenue is not up to the expectation. With the rapid advancement of DeFi (Decentralized Finance). Emerging platforms like DeFi Loans have started to gain prominence, offering undeniable advantages. DeFi lending, its automated and efficient nature, has attracted increasing users. DeFi lending processes such as deposits, borrowing, and liquidation are executed through on-chain smart contract code without manual intervention, significantly improving operational efficiency. Consequently, lending products have been rapidly classified and developed.
Defi Lending
Stablecoin Collateralized Loans
Predominantly led by MakerDAO. This lending model allows users to collateralize mainstream assets to borrow DAI, a stablecoin pegged to the US dollar.
Liquidity Pool Lending Model
Led by Compound, the liquidity pool lending model operates much like traditional banks, gathering funds from lenders in a fluid pool and disbursing them to borrowers while algorithmically balancing supply and demand and setting interest rates. This model is currently prevalent in the lending space.
For lenders, borrowing from a Compound requires over-collateralization of token assets to obtain a loan amount, and they can borrow other tokens, such as using ETH as collateral to borrow USDT.
Interest rates for loans and borrowings fluctuate based on the liquidity of the pool, determined by the ratio between the total currency provided by lenders and the total demand from borrowers.
Compound’s liquidity pool lending model is also widely adopted in the market, with many lending projects incorporating mining mechanisms, allowing both deposits and borrowings to participate in mining and earn platform tokens.
P2P Matching Model
Centered around Dharma, which serves as the primary platform, Dharma operates as a peer-to-peer protocol for matching borrowers and lenders, akin to an order book matching trading model.
Within Dharma, smart contracts act as “guarantors,” assessing borrowers’ asset prices and risks. Lenders then decide whether to extend loans based on the assessment the ” guarantor provides.” If borrowers fail to repay on time, the “guarantor” automatically initiates liquidation. The maximum borrowing period on the Dharma platform is 90 days, with fixed loan interest rates. During the lending period, funds are locked, and lenders start earning interest only after being matched with borrowers. Dharma sets its lending rates equally, which is a notable contrast to Compound’s model.
Flash Loans
In Aave’s collateral loans, one standout feature is Flash Loans. These loans enable developers to borrow without any upfront collateral. Flash Loans operate on the premise of code execution, allowing borrowing, utilization, and repayment to be programmed into a single transaction using smart contracts. Smart contracts ensure that all these steps are completed within 15 seconds. If repayment fails the entire transaction is reverted. With Flash Loans, the borrower can execute 20 to 30 operations in a single transaction. In other words, it means you can program borrowing, utilization, repayment, and other steps into a single smart contract transaction that completes in under 10 seconds. The advantage of consolidating all operations into one transaction is that if repayment is not made, the transaction fails. It will prevent borrowing instances without repayment.
NFT Loans
This innovative process utilizes non-fungible tokens (NFTs) as collateral to obtain loans, providing liquidity to NFT holders without selling their digital assets. While NFT loans bring additional liquidity and opportunities to the market, it’s crucial to note the volatility of the NFT market poses a significant risk. If the value of the collateralized NFT decreases substantially, borrowers may need to provide additional collateral or face liquidation of their assets.
World Finance Payment vs DeFi Lending
Despite the numerous advantages of DeFi lending, it also faces new challenges. Liquidation risks and flash loan attack risks are among the most prominent issues. Liquidation risk arises when the collateral value falls below the minimum collateralization ratio specified in the lending agreement. It can result in potential liquidation. Flash loans, on the other hand, provide convenience to developers but have also become targets for hackers, posing a challenge to the security of DeFi platforms.
Compared to traditional finance sector, institutions like World Finance Payment, the DeFi lending market is dynamic and filled with opportunities and challenges. With the continuous development and innovation of DeFi. expectation is that more lending models and solutions are going to emerge. And it offers further possibilities and potential for growth within the financial ecosystem. However, it is essential for development teams and the industry to collaborate and strengthen security and risk control measures to safeguard the interests of users and protocols.
About CipherBC
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