Decentralized Finance: How It Works?

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Regarding peer-to-peer lending, blockchain technology has made it much more efficient and easier for lenders and borrowers to connect. However, many startups are now using decentralized finance lending & NFTs as the foundation for their platforms. In this article, find out how decentralized finance lending & NFTs work and why they offer many benefits over traditional P2P lending models.

  • According to, in 2020, the non-fungible token (NFT) market is expected to be worth $232 million. It was valued at $22 billion in 2021, a significant increase. This upward trend is likely to continue due to its growing popularity in collectible trading and the ever-increasing importance of decentralized finance (Defi), with the market expected to triple by 2031.
  • As per stats from CoinMarketCap, the market capitalization of cryptocurrencies peaked at around $2.9 quadrillion.
  • Every day, five different cryptocurrencies process over 100,000 transactions, as per Coinmetrics.

What Is the Problem Decentralized Finance Lending & NFTs Aim to Solve?

Decentralized finance (Defi) lending and non-fungible token (NFT) platforms aim to solve several problems that centralized financial institutions still need to address adequately. Among these are high fees, lack of access to credit, and the need for more transparency.

Defi lending platforms offer a much more accessible way to borrow and lend money than traditional banks or other financial institutions. They also tend to have lower fees, and their terms are generally more transparent. In addition, Defi lending platforms are helpful for people in countries where access to credit is limited or nonexistent.

NFTs, on the other hand, provide a new way to own and trade digital assets. NFTs are unique, immutable tokens representing any asset, including video game items, digital art, and real-world property. Unlike traditional fiat currencies, NFTs cannot be duplicated or div; this is into smaller units. This makes them ideal for use cases where ownership needs to be verified and tracked.

How Do Decentralized Finance Lending Work?

Here we’ll explain how decentralized lending and borrowing platforms work, along with non-fungible tokens (NFTs), which play an increasingly important role in the Defi ecosystem.

Decentralized Lending & Borrowing Platforms

A key innovation of decentralized finance is accessing loans without going through a centralized intermediary like a bank.

  • Users can deposit their crypto assets as collateral on a decentralized lending platform and take out a loan for another asset.
  • The loan is secured by the deposited collateral, which remains under the borrower’s control throughout the loan.
  • Suppose at any point during the loan term, the value of the collateral decreases below a certain threshold. The loan is automatically repaid using the borrowed funds, and any remaining collateral is sold off to cover any outstanding debt.
  • Since they’re built on smart contracts, decentralized lending platforms can offer users a broad range of features and customization options.
  • For example, some platforms allow users to set their interest rates, while others use an auction-based model in which lenders compete for the right to provide a loan. Some platforms also offer flash loans, short-term loans that must repay within a single transaction block.

What Is the Future of Decentralized Finance Lending & NFTs?

Decentralized finance lending has grown in popularity in recent years as it offers borrowers and lenders more control over their money. NFTs have also gained traction as they provide a way to ownership for digital assets.

The future of decentralized finance lending and NFTs will be fascinating. With more people interested in these technologies, we expect to see more innovation and adoption. Decentralized finance lending could become the norm for borrowing and lending money, and NFTs could become commonplace for owning digital assets.

Realtime Example of Defi & NFTs

The combination of Defi and NFTs presents a robust use case for how these emerging technologies can work together. Let’s explore a few examples.

  1. One popular application of Defi is lending and borrowing platforms, which allow users to use their crypto assets as collateral and borrow against them at an interest rate set by the protocol. These platforms typically use ERC-20 tokens as collateral, but some are beginning to experiment with NFTs.
  • For example, the Maker Protocol allows users to collateralize their NFTs—such as CryptoKitties—to generate Dai, a decentralized stablecoin pegged to the US dollar. Maker is one of the most well-known protocols in the space, and it offers a decentralized lending platform called “DSLA” that allows users to take out loans against their Ethereum tokens.
  • The compound is another popular protocol The compound is another popular protocol allowing users to earn interest on the crypto assets they deposited and borrow them against them. And Dharma is a protocol that offers flash loans and other unique features.

2. Another example is using NFTs as collateral for loans on decentralized exchanges (DEXes). In this case, the NFT is valuable as the loan collateral rather than being traded for another asset. The lending platform Set Protocol has launched a product that allows users to collateralize their NFTs—such as Decentraland land parcels—to trade on decentralized exchanges.

3. NFTs are also useful for creating new financial instruments and contracts. For example, Fluidity is experimenting with using NFTs to represent real-world assets, such as shares in a company or real estate. These NFTs can then be traded on a DEX or used as collateral in a lending protocol.

Wrap Up

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