Decentralized Borrowing in DeFi (part 1)

Decentralized borrowing in Decentralized Finance (DeFi) is a system where loans are given without banks or middlemen. There is no middle party. It is just automated system where everything is done with the completion of code. It is built on blockchain networks, and smart contracts are used to manage the whole process. In simple words, you can borrow crypto by locking your own crypto as collateral. No third party is needed here.

This process is called overcollateralization. This method is introduced in this financial system for increasing the security and reducing the risk of world finance and trading. So, mainly it is done to reduce risk. The rules are coded, so trust is placed on code instead of people. If there is no error in code then there is no chance of error of delay in transection. You don’t need to fill long forms or wait for approval which is very common in traditional finance and banking sector. Everything is done quickly. As the system employs the direct transection method then it is so fast.

The system can look confusing at first, but it becomes easier with time. Now it is very common in many countries. Interest rates are often set automatically depending upon the use of network ans they can change based on supply and demand.In most DeFi platforms, users are allowed to deposit assets, and loans are issued against them. If the value of collateral falls, it can be liquidated, and this is something you must watch carefully.

That’s all for today. Hope to finish the topic in the next part of this topic.

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~ Regards,

VEIGO (Community Mod)