Decentralized Finance (DeFi) is the umbrella term for a range of unique financial services found in the blockchain industry that enable direct access to banking services like lending and borrowing without the use of middle-men like banks.
While the DeFi space is made up of many different tools and techniques such as yield farming, staking, NFTs, token swaps, and more, one of the most impactful and successful of these has been decentralized lending, whose platforms currently have more than $30 billion worth of users’ cryptocurrencies locked up in their coffers.
DeFi lending platforms allow users to borrow and lend money directly to other users without the use of intermediaries, and typically require the borrower to put up their own cryptocurrencies as collateral.
However, not all lending platforms are built the same. Let’s take a look at some of the most popular and unique DeFi lending platforms and see what they do well that others don’t.
Popular DeFi Lending Platforms
Aave
Founded in 2017, Aave has grown to become one of the most popular DeFi lending platforms in the industry. Aave offers a unique feature called a flash loan, which enables someone to borrow money without any collateral whatsoever, provided the money is paid back within the same transaction that it was sent.
Flash loans enable traders to take advantage of arbitrage and other trading opportunities without having to risk their own funds, and are primarily a tool created for developers to integrate into other financial services apps.
Aave also offers traditional loans of up to 80% of the value of the collateral deposit on over 30 cryptocurrency assets, at either fixed or variable interest rates.
Aave’s liquidity pools can be contributed to by anyone, enabling the average person to become a borrower and earn passive income on their investment, typifying the kind of accessibility that’s representative of DeFi in general.
Nolus
Nolus is a multi-chain DeFi platform that looks to innovate the process of lending and borrowing by introducing a system more akin to a traditional lease contract.
Whereas most DeFi lending platforms require users to put up major collateral to take out a loan, Nolus enables users to loan crypto assets with just a small down-payment, followed by regularly scheduled future payments at fixed interest rates.
This is a radical departure from the common practices of the DeFi lending space with its high over-collateralization requirements and breaks down barriers for those seeking crypto asset loans. Nolus also enabled borrowers to leverage their down payment by a factor of 3x, further reducing the capital requirements necessary to engage with DeFi lending.
What’s more, liquidation rates have been shown to be much lower on Nolus than on other platforms (just 0.5%), making its unique leveraged leasing offering one of the safest lending and borrowing options in the DeFi space.
If a lender doesn’t pay back their loan or misses a scheduled payment, Nolus cannot liquidate all of the user’s collateral at once. Rather, it debits the scheduled amount from the user’s collateral deposit until the loan is paid off or the collateral is eventually depleted. Users can also put their leveraged assets to work on yield-bearing strategies whitelisted by the protocol.
Compound
Compound Finance is an Ethereum-based lending protocol with over $2.4B in TVL (total value locked) that offers dynamic interest rates based on self-adjusting algorithms which react to supply and demand in the market.
Compound’s dynamic interest rates have played a big part in facilitating competitive rate pricing for the average DeFi user, and in creating capital efficiency for holders of the 18 crypto assets it provides loans on.
To borrow on Compound, a user must deposit collateral in the form of their own cryptocurrency tokens. The user can set their own borrowing rate based on their collateral amount, going up to as high as 90% of the value of the collateral deposit.
One downside is that Compound is only based on the Ethereum blockchain, which makes it less accessible and interoperable than it otherwise could be. It is also somewhat complex for first-time users to navigate.
Conclusion
There are a plethora of lending and borrowing options available in the DeFi space today, all offering unique takes on traditional finance concepts, and the space is continuously evolving.
As the concept of DeFi lending catches on among mainstream investors drawn to the space due to ETF approvals or growing crypto adoption, the aforementioned three platforms and others will play a big part in shaping the future of decentralized finance.