Decentralized finance (DeFi) is one of the best gifts of blockchain technology, and it is here to stay. And, for a variety of reasons, this financial breakthrough will undoubtedly alter the way global financial services operate, as well as how people transact on a regular basis.
If you are wondering, DeFi is not fundamentally different from traditional finance (TradFi), as many are made to believe. While the biggest difference between the two is inherent in their fundamental technologies, both offer the same services.
For context, DeFi is traditional finance built on blockchain technology. This, therefore, implies that, by employing blockchain technology at its core, DeFi is able to eliminate any form of centralization (or related system) as in the case of TradFi.
In addition, by adopting blockchain at its core, DeFi applications (dApps) are automated and are able to run independently with the help of smart contracts, which technically replace the centralized system found among TradFi services or applications.
That said, you will typically come across the same financial services within the TradFi ecosystem in the DeFi ecosystem. This also means that the concept behind most dApps services is practically the same as those in the TradFi system.
Understanding DeFi Lending and Borrowing
Lending and borrowing, for example, is a popular solution in the DeFi ecosystem. While it fills the financial accessibility gap lagging in the TradFi system, it also doubles as a financial service enabler. Notably, DeFi lending platforms are assisting in the widespread adoption of blockchain and cryptocurrencies alike.
In DeFi, investors can participate on lending platforms by contributing into a loan liquidity pool as a form of investment over a period of time. Afterwards, the investors subsequently get both capital and interest via the decentralized network.
On the other hand, a borrower can take from the loan liquidity pool while agreeing to specified conditions such as providing collateral, as well as repaying the loan on or before a certain date.
Generally, the entire process of lending and borrowing in DeFi is automated, thanks to the combination of DApps, smart contracts, and collateralization, among other DeFi protocols.
In this article, we are going to list some of the best lending protocols to watch out for, but just before we get right to it, let’s quickly provide an answer to a frequently asked question: “why DeFi lending?”
Why DeFi Lending?
In addition to providing a more seamless and decentralized system to what we have in TradFi, DeFi lending further provides a lot of investment opportunities for both lenders and borrowers.
While the benefits of DeFi lending vary depending on the platform, below are some common benefits across different platforms.
- Basic benefits: Yes! Regardless of the platform you decide to stick with, all DeFi lending platforms offer these four major attributes: permissionless, transparency, immutability, and programmability.
- Yield farming: The fundamental concept of any lending platform is yield farming, which essentially involves lending or staking out money into a liquidity pool in order to earn interest over a given period. Usually, this benefit is only available to the liquidity provider.
- Hedge funding: It is no secret that some cryptocurrencies are extremely volatile, implying that they are prone to deflation. By staking in a lending platform, investors can effectively avoid deflation. To do this, the loan platform employs a variety of strategies to provide active returns for all investments made in its liquidity pool.
- Improved loan origination speed: Unlike with TradFi, the process of lending and borrowing in the DeFi ecosystem is faster. The reason for this can be attributed to the lack of intermediaries as well as the fact that the entire process is automated with smart contracts.
- Greater consistency in lending decisions: In addition to improving processing speed, smart contracts also ensure consistency in lending decisions. On the contrary, middlemen in TradFi tend to be sentimental or biased with their decision, which ultimately makes it hard to achieve consistency in such activities as deciding who gets a loan, when, and how soon the loan is processed.
Moving on, the following are the top 10 DeFi lending platforms to watch out for in 2022. While the list is based on critical evaluation, it shouldn’t completely inform your decision. In other words, you should always do your own research before investing in any of them.
Also, it’s important to understand that some lending platforms require collateralization while others do not. As such, we will categorize the list into two; the first will consist of lending dApps that require collateralization, while the second list will consist of those without collateralization. Without further ado, let’s get to it!
DeFi Lending Platforms with Collateralization
10. Compound: Based on the Ethereum blockchain, Compound is an open-source, autonomous protocol built for developers. However, the platform also doubles as an algorithmic efficient money market for investors.
Unlike most lending platforms, Compound makes use of a different approach in its collateralization model. Specifically, the network allows the tokenization of any asset deposited in its liquidity pool. For instance, when a user deposits ETH or other acceptable crypto assets, the person receives cToken, which doubles as the network’s native asset.
This cToken, or COMP token as it is otherwise called, can subsequently be used as collateral when requesting a loan, staking, or trading in the network’s marketplace. Currently, Compound offers support for up to nine crypto assets issued on Ethereum including BAT, DAI, SAI, ETH, REP, USDC, WBTC, USDT, and ZRX.
In addition, Compound offers different lending and borrowing rates across its supported crypto assets. As of now, the network charges 0.03%, 2.99%, 0.14%, 3.08%, 0.29%, 2.2%, and 2%, for BAT, DAO, ETH, USDC, WBTC, USDT, and ZRX, respectively.
9. Maker: Maker is an open-source decentralized borrowing and lending platform, popularly known as Maker DAO (which also happens to be the name of the creator of Maker protocol). The protocol is also well-known for being the first of its kind, and according to popular opinion, one of the best DeFi lending platforms.
The network operates a dual token model including MKR and DAI, both of which are ERC-20 standard tokens. While MKR serves as the network’s native/governance asset, DAI is pegged to the US dollar and is issued to lenders once they deposit any of the 25 supported crypto assets as collateral in Maker DAO’s liquidity vault.
Borrowers, on the other hand, can also access the DAI liquidity pool for loans. However, to borrow from the Maker DAO’s liquidity pool, you must have previously contributed to the platform or procured additional collateral so as to increase exposure.
8. Instadapp: Founded in 2018, Instadapp is an Ethereum-based multipurpose DeFi application that manages digital assets. In addition to that, the platform provides a variety of DeFi services including lending, borrowing, swap, leverage, and many more.
With respect to lending, Instadapp doubles as an aggregator for lending platforms and enables users to switch between platforms with the best interest rate in one click.
Due to its nature, Instadapp provides users with a smart wallet portal for DeFi protocols, implying that a single wallet can be used across supported lending platforms. For context, owning an Instadapp account can be compared to owning a Coinbase wallet or MyEtherWallet or any related one to facilitate loans, borrow, trade, or swap digital assets.
7. Aave: Perhaps the fastest growing DeFi platform, Aave is based on the Ethereum network and operates as an open-source and non-custodial protocol. While it is dubbed as the “money market protocol,” Aave is prominent for its lending and borrowing services among other offerings.
The network, like most lending platforms, operates a dual token model; the first, LEND, doubles as the network’s native asset, while the second, known as aToken, is an ERC-20 token that is issued to lenders as interest.
Also, unlike other lending platforms, Aave operates a hybrid lending system whereby it offers both collateralized and uncollateralized loans to users. Likewise, the platform also offers additional loan services such as “rate switching,” Flash Loan, and unique collateral types.
Another major benefit of Aave is its support for many assets including Synthetix (SNX), TrueUSD (TUSD), USD Coin (USDC), Tether (USDT), Wrapped BTC (WBTC), 0x (ZRX), Synthetix USD (SUSD), Kyber Network (KNC), Aave (LEND), ChainLink (LINK), Decentraland (MANA), Maker (MKR), Basic Attention Token (BAT), Dai (DAI), Ethereum (ETH), and Augur (REP).
By supporting numerous digital assets, investors have to adjust to a varying interest rate on each token across different loan services. Notably, the interest rate varies from originating and flash loans at 0.25% and 0.09%, respectively.
TVL: $11.92 B
6.Uniswap: Almost four years since its launch, Uniswap, the acclaimed largest decentralized exchange operating on the Ethereum blockchain is still loved by many.
The decentralized exchange, which is also prominent as an open-source protocol for providing liquidity and lending, enables users to swap between ETH and other ERC-20 tokens as well as earn a fee by contributing any amount to the liquidity pool.
Uniswap also functions as a non-custodial exchange, implying that users are in charge of their crypto holdings and not the exchange network. This, coupled with an easy-to-navigate user interface, makes token exchange on the network very seamless and less nerve-wracking.
While a user can trade any ERC-20 token on the platform as well as provide liquidity, they can also add liquidity to an existing pool or create a new pool entirely. Notably, each token listed on Uniswap has its own pool that users can contribute to, and the prices for each token are determined using what the network describes as an automated market maker system.
In addition, every liquidity pair is represented by an ERC20 token that is unique and easily transferable. This further implies that setting up a liquidity pool on Uniswap is simple as you only require a token pair for markets.
TVL: $7.41 B
5. Solend: This is another fast-rising decentralized lending and borrowing protocol to keep an eye on in 2022. Notably, Solend is powered by the Solana blockchain and it aims to be the easiest lending protocol to use while leveraging Solana’s secure infrastructure.
While it is dubbed as the “autonomous interest rate machine for lending on Solana,” Solend lets users earn interest both on deposits and borrowed assets. So far it enables users to earn interest on as well as borrow up to 33 assets across 11 pools comprising NFTs, Stablecoin, Meme tokens, and many more.
As of now, a user can deposit any of the four major supported assets including USDC, ETH, SOL, and BTC. Afterwards, a user can decide to stake in any of the assets provided across the available 11 liquidity pools and subsequently receive a yield on the initially deposited asset after a predetermined period of time.
In terms of protocol fees, Solend charges an interest rate for borrowing assets that is based on the utilization of the pool. Also, there is an additional origination fee that is charged upon the origination of loans. Usually, the origination fee is made up of the program (i.e transaction) fee and the host (i.e rent) fee.
Solend TVL: $705 M
4. Curve Finance: This is another Ethereum-based decentralized exchange and liquidity protocol that allows for the effective trading of stablecoins. Notably, users are allowed to trade with very little slippage swaps of stablecoins leveraging the network’s low-fee algorithm.
In a unique manner, Curve Finance also supplies liquidity for other lending platforms in an attempt to generate more revenue for native liquidity providers. Currently, Curve Finance’s liquidity is spread across seven major curve pools including Compound, PAX, BUSD, Y, REN, sUSD, and sBTC.
With the above in place, each pool mints its own specific ERC-20 tokens to liquidity providers as interest that can be exchanged for various distinct assets.
TVL: $19.8 B
DeFi Lending Platforms without Collateralization
3. Atlendis: Unlike the majority of collateralized lending platforms, Atlantis is a capital-efficient lending protocol that provides uncollateralized crypto loans. This means that lenders issue funds in an unsecured loan based solely on the borrower’s creditworthiness and promise to repay.
Given the above reason, lenders get to determine their own lending rules and practice, which include choosing the borrowers they trust to lend to as well as determining their own lending rate. Also, by gaining granular control over their portfolios, lenders can mitigate losses based on their own personal risk assessment.
The borrower, on the other hand, only has to pay a liquidity fee on unused capital in their own liquidity pool. More so, unlike taking secured debt from a collateralized platform, Atlendis does not restrict borrowers from using capital how and when they want. This way, borrowers’ potential for enhancing returns for lenders is not limited at all.
Another unique feature of Atlendis is that each lending position is represented by an NFT piece and can be monitored through the network’s dashboard. The best part is that these NFT-represented positions can be sold, thereby opening up a wide range of trading activities.
Ultimately, Atlendis is solving the existing issue of over-collateralized lending in traditional lending protocols by creating a more capital-efficient environment.
2.Goldfinch: Here is another uncollateralized decentralized lending platform. And the best part of this particular project is that the funds borrowed can be used in real-world activities that are not correlated to crypto.
Also, by incorporating the principle of “trust through consensus,” the Goldfinch protocol creates a way for borrowers to show creditworthiness based on the collective assessment of other participants rather than based on their crypto assets.
The protocol can then use this collective assessment as a signal for automatically allocating capital. By removing the need for crypto collateral and providing a means for passive yield, the protocol dramatically expands both the potential borrowers who can access crypto and the potential capital providers who can gain exposure.
The lending and borrowing process for Goldfinch is quite different from others. Notably, the Goldfinch protocol has four core participants: Borrowers, Backers, Liquidity Providers, and Auditors.
Unlike in other uncollateralized platforms where lenders make the rule, Borrowers in Goldfinch set the term of the borrowing pool, including the interest rate and repayment schedule.
Backers, on the other hand, assess the borrower pools and decide whether to supply first-loss capital. Once that is done, borrowers can borrow and repay through the borrower pool.
Liquidity providers, however, supply the capital to what the platform describes as a “Senior Pool.” The protocol then automatically allocates the Senior Pool to the senior tranches of Borrower Pools, usually based on how many backers are participating in them.
Lastly, the role of Auditors in the entire process is to vote in order to approve borrowers ahead of borrowing. In this case, Auditors are randomly selected by the protocol, and they are tasked to provide human-level checks to guard against fraudulent activities.
TVL: $13.31 M
1. TrueFi: This is another uncollateralized lending platform powered by the world’s first on-chain credit scores and governed by holders of True Token (TRU token).
Prior to TrueFi, most of DeFi’s success was fueled by overcollateralized lending, which hampered the industry’s mainstream adoption at the same time. TrueFi’s introduction of credit scoring to crypto is widely seen as the next transformative step for DeFi, and it will, without a doubt, push mainstream adoption of DeFi moving forward.
While TrueFi’s goal is to bring uncollateralized lending to DeFi, it helps crypto lenders to enjoy attractive sustainable rates of return, while giving cryptocurrency borrowers predictable loans that maximize their working capital. TrueFi works in four major steps;
- Lenders add assets into a TrueFi lending pool to be used to fund new loans, for which lenders earn interest and TRU, the network’s native asset. Any unused capital is sent to Curve.fi (an external protocol) to maximize earnings.
- Borrowers (currently reserved to institutions, rather than retail borrowers) are whitelisted through a rigorous onboarding process that involves a deep review of their business, the signing of an enforceable lending agreement, and TRU community‘s approval.
- Borrowers, once approved, submit a request for capital at an interest rate and credit limit determined by their credit score, which is subject to further TRU community approval. The TRU community is also required to signal their opinion on the loan by voting “Yes” or “No” on each loan.
TRU stakers are usually incentivized to vote on new loans carefully, as their staked TRU may be liquidated (at a maximum rate of 10% of staked TRU) to protect lenders in case of default.
- The Borrower must return the principal and interest on or before the term expires. Delinquent borrowers will face legal action pursuant to the loan agreement signed during onboarding. Learn more about defaults here.
TVL: $193 M