DeFi Borrowing market overview

In this article, I will describe the borrowing market in decentralized finance.

As this domain is really new, I will do my best to make it easy to understand and also provide you the resources to do your own research.

The total borrowing value outstanding in DeFi is now over 10B$, which shows a massive growth compared to last June when it reached its first 1B$.

💡If you’re new to this space, these protocols are the ones you need to understand the concept of decentralized banking.

Now that we have seen how this market is blowing up, let’s see what a loan looks like in DeFi.

First we need to get the concept of collateralized loans to understand how to borrow from a decentralized protocol which doesn’t know their customers.

We can explain it taking traditional finance as example.

When you go to the bank, you can borrow against your house.

Your house in the bank is a guarantee (collateral), and if you’re not repaying the loan, they will sell your house to get their liquidity back.

This selling operation represents a liquidation.

In DeFi, instead of your house, the collateral has to be a crypto asset (ETH, BTC for example).

The borrowers must provide a collateral higher in value than their borrowed amount, to guarantee they will repay the loan.

In the case your collateral value decrease and it begins to drop closer to your loan value, the platform has a mechanism to stay healthy by enabling other people to sell your collateral and to repay your debt. This is what is known as “liquidation”.

Find below some ressources to dig into collateralized loans and the concept behind it:

A frequently asked question is why users don’t directly spend their cryptos.

Because using a loan allows them to let their collateral safe while acting on the markets with their borrowed assets.

The actual usecases in DeFi are mostly traders oriented, leveraging their collateral for other operations (hedging / trading), thus putting their capital at work.

The other usecase we see is using credit from a protocol to pay for daily living expenses. This is currently limited due to the high cost of blockchain transactions fees such those in Ethereum.

It’s the same concept as a credit card in a traditional bank, you don’t spend your money, you pay with a credit line that your bank allows you to spend (in our case a decentralized protocol).

We believe it will grow in the future with the upcoming solutions that allows users to pay almost zero fees on their transactions.

We expect a bright future for this market, as long as the DeFi continues to grow and the entry barriers such as Ethereum transactional costs start to decrease.

It provides the same services for anyone, the time you have access to internet.

We can mention two interesting projects:

This project aims to provide a solution for undercollateralized loans, an interesting concept in DeFi, considering the platforms don’t directly know their users.

What they do is associating a credit score to a specific account, based on its transactions history, combining artificial intelligence and blockchain, opening new possibilities for the future.

You probably know non-fungible tokens (NFT) mostly trending as tokenized art pieces or game items, using the blockchain to proof their scarcity.

In the future, we believe that anyone will be able to lend and borrow NFTs as this standard allows the tokenization of any digital or real world assets such as cars, real estate or any other valuable assets.

We have discussed on a previous article what Fuji is, but for those who missed it; here is a quick recap:

Fuji is a borrowing aggregator.

We aim to minimize the borrowing costs of our users by routing their loans to the lowest rate available across different protocols.

In the background, Fuji refinances its pool of users automatically, saving them time and money.

As a consequence of Fuji’s operations, it will lower the volatility between the different protocols rates, improving both user experience, and market’s efficiency.

The decentralized borrowing market is growing at a constant fast rate and new projects are coming with innovative features to make it reach new universes.

Let’s discover and be surprised by this space evolving 24/7/365 and buckle up for what’s coming next.🚀

Thank you DeFi readers!

Any comments are welcome to improve these articles.

PS for any inquiries, contact me on Telegram @edgarillo.

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