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Traditional Vs DeFi: Quick Insight to Select Best for Borrowing

Difference between traditional lending and defi lending

By Denver HemsworthPublished 2 years ago 5 min read
Traditional Vs DeFi: Quick Insight to Select Best for Borrowing

DeFi protocols are the accelerating platforms and they are the fast-growing solutions in the crypto space. They are the competing solutions to the traditional finance sector. The utilization of smart contracts on the basis of the Ethereum blockchain in the fast-growing cryptomarket enables the capital flow smart in the crypto market.

The arrival of DeFi lending disrupted the traditional trending sectors positively. An analysis of DeFi lending and traditional lending is necessary prior to select the best platforms for borrowing money. It is necessary to know the workflow of traditional and DeFi lending.

This blog illustrates all the details about them and discusses the profits with Decentralized Finance DeFi lending in detail. Let's move to the blog.

How Traditional Lending Works?

During money lending to borrowers, banks and the money creditors charge the rate during money credit analysis. To secure the loan, the borrower can use the collateral form.

The collateral form includes a person's automobile or house. There is the valuation of personal assets prior to collateral form. The borrower gives the high rate and borrows the limited funds without any collateral.

The lender allows the payments in the installment form quarterly, semi-annually, and monthly. When the credit score of the borrower is high, then the payments get low.

During the money lending/borrowing process in the traditional model, the creditors provide a better rate to those who have a high credit score.

E.g. Low credit scores borrowers pay a 36% interest rate. High credit score borrowers pay a 10% rate of interest.

Getting approval from the lenders after financial rules and regulations allows the borrowers to draw capital amounts easily.

Now, you are aware of the flows in traditional lending. Next, you must know the workflow of DeFi lending.

How DeFi Lending Work?

DeFi defines the emerging financial ecosystem where the lending activities are performed through Distributed Ledger Technology(DLT). Both lending and borrowing via smart contracts provide the solution to the risk functions of traditional finance.

The unique characteristics of the DeFi lending system are shortly listed as follows:

  • Lenders can put their cryptocurrency holdings. Using them, they can gain interest.
  • Borrowers can receive the funds in the form of digital assets.

Borrowers easily access the liquidity only if they have enough collateral. In DeFi lending, the determination of interest rates is surely based on the algorithm. As part of the Decentralized Autonomous Organization(DAO), account holders can vote on the interest rates.

With DeFi lending, idle crypto assets turn into an active state. Also, promising returns assured one. Issue of native currencies continually at a steady pace, investors facing the risk of losing digital assets. DeFi lending is the attentive solution to this risk.

Most of the lending applications do not allow traditional credit card checks and potential borrowers. Collateral posting is an essential one to mitigate fraud and risk. The processes in the DeFi lending are as follows:

  • Borrowers need to provide their assets as collateral without any KYC approval.
  • Users now borrow once the collateral is provided. Then, this point is referred to as Collateralized Debt Position(DCP).
  • Secure your loan amount by over-collateralization
  • Collateral deposits depend on (Loan-to-Value) ratio
  • Lending protocol issues the loan amount in the form of a stable coin.
  • There is no reclaiming the collateral at any time.
  • Collateral to Deposit(CTD) value in the form of Ether(ETH)
  • In case the borrower cannot pay the loan amount, collateral gets liquidated.
  • Comparing the workflow of DeFi lending with traditional lending, DeFi serves as the simplest platform for both the token holders and the stakeholders.
  • If the borrowers face difficulties in order to secure the loan, then DeFi is an option. There are no documents required in the DeFi lending phase.
  • Borrowers need to have a digital asset like BTC or ETH to lock the smart contract.

The difference between DeFi lending compared to traditional lending is illustrated as follows.

Traditional Lending

Governance: Either by service providers or self-regulated organizations

Collateral requirements: No collateral or less collateral than a cash grant

Clearing & Settlement: After the Pre-Defined Period

Custody of Assets: Assets are held on behalf of licensed service providers

Investor protections: Government-mandatory exposure & anti-fraud legislation

Cross-Service Interaction: Limited & Intermediaries-based interaction.


Governance: Administered by protocols authors with voting rights

Collateral requirements: Overcollateralization occurs

Clearing & Settlement: Publishing transactions complete the settlement process

Custody of Assets: Storage of funds in non-custodial wallets

Investor protections: Private remedial mechanism ensures security

Cross-Service Interaction: Services can be integrated one with the same or other platforms

I hope, now you are very clear in the workflow. It is time to know the benefits of DeFi lending.

Digital Profits With DeFi Lending

Usage of smart contracts in the DeFi platforms allows the borrowers to get their loans quickly. To make this happen, they connect the wallets to the site. Without any third-party involvement, the process gets streamlined. Furthermore, advantages are there while using DeFi lending. Take a look at them.

Absence of Intermediaries

Since smart contracts are autonomous, making agreements is now easy without any intermediaries. Borrowers can borrow at low-interest rates.

Act Without Permission

DeFi protocols are transparent and anyone with crypto wallets can join. The users can play the role of lender or borrower on the basis of the platform’s requirements.

Extreme Transparent

High transparency and trust are major perks in DeFi lending. The DeFi platform works on blockchain technology, see the smart contract code and how the system functions clearly.

Crypto Assets Control

Traditional or centralized lending is open to errors and attacks. Comparatively, the users in the DeFi lending platform retain control of assets and follow the steps to protect the data.

Investment Rewards

Giving reasonable rewards to the investment allows the lenders to earn passive income for the crypto assets. Developing several reward categories enables long-term investments and grows revenue in a speedy way.

Key Takeaways

DeFi is a recently emerging concept in the crypto space where the development of DeFi lending/borrowing platforms provides several benefits compared to traditional lending as listed in this blog. If you wish to enter into the lucrative crypto industry, then this is the right time to make your investments in the DeFi platform. Let's begin now to reap the revenue benefits of DeFi lending.

smart contract

About the Creator

Denver Hemsworth

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