Global Fintech Circle, which will go public, explains how DeFi lending is similar to traditional lending processes
The Global FinTech Team Circle, which will go public as part of a $ 4.5 billion PSPC deal, notes that the promise of decentralized finance (DeFi) is to fundamentally transform or improve financial services by providing greater transparency, security and community governance by leveraging blockchain or distributed ledger technology (DLT) infrastructures.
Circle writes in a blog post that lending platforms dominate the DeFi space, as they aim to simulate conventional borrowing and lending services while “relying on decentralized networks.” As of June 2021, over $ 26 billion had been stranded in various DeFi lending protocols, nearly half of TVL’s total figure of all DeFi initiatives at over $ 50 billion.
While explaining what DeFi loans can offer, Circle’s blog notes that conceptually, there is no major difference between DeFi loans and traditional lending processes. The blockchain-focused company points out that lenders offer funds to borrowers in exchange for an agreed interest rate.
But the main differences “show up in the way these processes work,” Circle adds, noting that in traditional finance, loans can be facilitated by banks and other financial institutions. Meanwhile, in DeFi, all activity “goes through decentralized protocols and no intermediary is involved,” the company’s blog says.
He also notes that unlike traditional banking services, DeFi platforms are “borderless and can be used by anyone.”
As mentioned in Circle’s post:
“With DeFi loans, borrowers and lenders have full control over their funds, as all processes are driven by smart contracts, which are self-executing programs that run on blockchain networks.”
Lenders looking to take advantage of competitive interest rates on DeFi protocols are required to deposit their virtual currency, such as USDC, into “stand-alone” loan pools. This is done by sending their tokens to a smart contract, “making them available to other users for borrowing,” the Circle team explains.
They also noted that in return, the smart contract “issues interest tokens which are distributed automatically to the user and can be redeemed at a later date to access the deposited assets.”
“A distinct aspect of DeFi loans is that the majority of loans are oversized, meaning borrowers have to provide more collateral than the value of the loan. This happens because most of the cryptocurrencies used as collateral are volatile, while there is no credit rating or identity verification. Despite this, the ease of accessing funds is an obvious advantage that attracts many users.
They further noted:
“Overall, DeFi loans benefit both lenders and borrowers. The latter can easily obtain loans, while the former can earn interest rates often higher than traditional rates offering a potential source of passive income.
Stablecoins play a key role in DeFi lending protocols as they are widely used to reduce or mitigate volatility risks and make “more convenient for lenders and borrowers to better manage their financial transactions on DeFi protocols”.
The USDC was the fastest growing dollar-indexed stable currency, becoming the eighth largest crypto as of July 15, 2021, with a market cap of over $ 25 billion.
The USDC is poised to dominate the DeFi space as it maintains a fairly stable peg to the USD, which is backed by regulated institutions – Circle and Coinbase – and is also “chain agnostic (available on multiple blockchains). different and not connected to a particular DeFi protocol).
Available data reveals that USDC was the fastest growing and ‘most popular’ stablecoin among DeFi applications during the first quarter of 2021. For example, USDC’s TVL in DeFi protocols has increased from less than $ 50 million to over $ 1.5 billion as of July 15, 2021..
Circle’s blog further noted that although USDC is a multi-chain token, “most of its circulating supply is based on Ethereum, making it a practical choice for most lending protocols. DeFi, because they are also based on Ethereum smart contracts “.
Circle further revealed that USDC has managed to “stay at the top of the DeFi space with its near-instantaneous settlement speed, a high degree of security and a major emphasis on transparency and regulatory compliance.”
The company’s blog post added that Circle’s stablecoin shows “the smallest deviations from the $ 1 price target among the largest stablecoins according to data from Flipside Crypto, making it the best option. for lenders looking for stability “.
The company added:
“Lenders can file USDC to earn interest on their principal. USDC holders can lend their tokens on DeFi lending protocols, such as Aave and Compound. On Compound, the USDC is the most deposited token, accounting for over 25% of the total value locked in the protocol.
On Aave, USDC is “by far the most deposited and borrowed token, with a total market size of over $ 4.2 billion as of July 15, 2021”.
For more information on Circle, click here.