The challenge of losing track of its core vision as it gradually resembles the idea it aspires to change – Bitcoin Editorial News – News Couple
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The challenge of losing track of its core vision as it gradually resembles the idea it aspires to change – Bitcoin Editorial News


As the challenge continues to expand, it risks adopting the ideology it initially sought to reject because the primary beneficiaries of this new financing model are those who already own the digital assets.

Replacing intermediaries does not directly improve financing

When it comes to financial products and solutions, almost everything comes with an advantage, whether it’s exceptional returns on investments or low financing rates. Decentralized Finance (DFI) is no exception.

Davy gained immense popularity as it sought to remove the problems and negatives inherent in traditional finance. While there is no denying that the advent of the challenge has already reduced the barriers to accessing financial solutions, we cannot overlook the uncomfortable reality that the challenge has become, at least to some extent, like tradfi, with the sign of “decentralization”.

The line between divvy and tandem lending

In the traditional system, anyone who wants to borrow money from banks or private lenders must submit their credit score. If the result meets the criteria, the loan is approved at a fair rate. If the credit score is low, the borrower may need to waive higher rates. In some cases, the lender may also require the borrower to provide collateral for the loan.

While peer-to-peer exchange challenges central authorities, access to products such as conflict lending requires borrowers to provide large collateral, often higher than the total amount they are willing to borrow, the so-called excess collateral. Moreover, entering the challenging market and using its financial products requires an understanding of blockchain technology and cryptocurrencies – knowledge that a small portion of the world’s population possesses.

Lending Defi was initially put in place to facilitate “real decentralized lending” where anyone in need of capital could get a loan without any intermediaries. Unfortunately, that’s not what induction lending looks like today. It has effectively evolved into another mechanism for existing digital asset holders to generate returns by operating what they already own. The challenge today is not to empower the unbanked people of the world.

As such, Defi appears to be more lender-oriented and not as comprehensive as advertised. Take, for example, the equivalent growth of the ecolending system in recent months. Leading lending platforms and protocols have amassed a total unlocked value (TVL) of more than $60 billion.

AAVE, an open source, non-security lending and borrowing protocol, has approximately $20.96 billion worth of TVL spread across the Avalanche, Ethereum, and Polygon liquidity and staking pools. Similarly, at the time of writing, Maker DAO boasts a TVL of $17.06 billion and soaring, Compound TVL of $11.33 billion, and Instadapp is ordering nearly 12.17 billion TVL, highlighting the challenge’s rapid growth overall.

The lines between tradfi and defi are fading at an alarming pace. Here is an example.

A small business owner from a developing country needs financing. Unfortunately, they do not have access to traditional financial services. It somehow happens when you select lending and create an account on one of the existing platforms. When they apply for financing, they realize that the demands for collateral will be more than they want to borrow, which they clearly don’t have.

We must also look at the other side, the perspective of the specific lending platform. It is understood that objectionable lending platforms need collateral to protect the lenders’ investments. But does he justify the need for loans with excessive collateral? Currently, Defi does not bring unbanked people into the system but rather rewards outstanding cryptocurrency holders with a return on their existing assets.

Unsecured tariff lending: great in theory, but there are downsides

Honestly, there are no collateral lending platforms (I didn’t find any), except for Gluwa, which is an alternative financial system for the unbanked. Gluwa has partnered with several international companies such as Aella, Multis, Creditcoin, Jenfi, Wyre, Gopax and Consensys in emerging markets. Its integration with Aella’s consumer credit app has reached more than two million customers across Africa. To date, Gluwa and Aella have facilitated over a million transactions, creating over 28 million blocks in the process.

Gluwa does not require users to post guarantees. but there is a problem. The interest rate on these unsecured loans is much higher than the usual secured loans available from AAVE, Compound and similar platforms.

As such, Gluwa, although an experimental solution, shares many similar features with the traditional lending and borrowing model, such as unsecured private lending where the lender deals with higher-risk borrowers and passes that risk in the form of higher interest rates.

way forward

Between deferred loans with excess collateral and unsecured loans with high interest, there is a lot to consider. While the platforms demand guarantees, they actually make it easy for anyone to access capital with the click of a button. But again, only for people who already own digital assets. It negates the idea of ​​inclusivity and equal opportunity for all—essentially the foundations of the challenge. The flip side of the set coin is that unsecured loans charge higher interest rates to balance risk, which once again undermines the challenge vision of achieving fair and justifiable profits for all.

A truly decentralized lending and borrowing process must balance both risk and return for both lenders and borrowers, which is difficult to achieve. So, in the future, we may see a better version of decentralized lending, or we may end up with “real” decentralized lending, which is just like the traditional financial market, and thus come full circle and become the very thing that one day wanted to change.

What do you think of today’s lending challenge – fair or not? Let us know in the comments section below.

photo credits: Shutterstock, Pixabay, Wiki Commons, DataDrivenInvestor.com

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