What is DeFi Lending and How Can I Buy a Home with It?

Buying a home is an expensive venture that requires a lot of financial planning and normally involves getting a loan. The home acquisition process can become more complicated when you have alternative funding methods such as limited lenders who charge high-interest rates. But there’s a new option making its way to the table by way of cryptocurrencies – The brand new world of DeFi lending.

Decentralized finance is an alternative method of lending that allows borrowers to get money from decentralized lenders instead of only one. DeFi lending works like the traditional lending protocols in that the borrower still has to pay interest and the lender gets profits through that interest; however, the protocols have higher interest rates and they operate on a pool-based structure, which eliminates any need for human involvement. As a result, the process is more transparent, fast, and accessible globally.

Advantages

As a lender, when you deposit in Decentralized Financing, the assets will go into a pool instead of an individual borrower. The borrower gets the funds from that pool instead, after which you will be given a portion of the interest rates the borrower begins to pay. Some of the advantages you can experience from this process include:

Lack of human intervention since a single institution is not running them. The terms and conditions are usually written in code and supplied as a smart contract, which is then deployed to the block chain. The applications then rely on these codes, and the users follow the smart contract as guidelines. The only human interaction is in the form of maintenance or code upgrades that the system developers do.

The ability for any user to audit the codes encourages transparency that is sometimes lacking in traditional lending institutions. As a borrower, you can go through the functionality of the system and discover any bugs that may be present. Transactions are also made available for the public to see; however, they are not associated with your real-life identity, which still offers protection and confidentiality.

The services are available for worldwide users. Regardless of which part of the world you’re in, you can access the network and funds. You have to consider the local regulations in your locality before borrowing. Global requirements are also limited. With a good internet connection, you can access the digital currency assets.

Users of DeFi can also make any changes they want without being held liable to anything. For instance, if you don’t like the kind of features on an interface, you can use the network’s resources to build your app.

All these advantages don’t just make borrowing easier, they also enhance your user experience with the decentralized financing network.

How it works

DeFi has different lending platforms that borrowers and lenders can use to access the resources they need. The platforms tend to have higher interest rates, which can benefit lenders more than borrowers, but the fact that they also allow borrowers to leverage existing assets makes it worth it. If you have a low-valued digital token and want to buy another one, or you need funds for your home, you can use your low-valued tokens as collateral to borrow some assets on the platform to get the funds you’re interested in. You will have both assets, wait for the values to increase, then sell them to pay off what you borrowed.

Collateral:

This shows that decentralized finance also requires collateral, just like traditional lenders. Your collateralized assets will act as security on the platform in case you fail to pay off your debt. The collateral has to be digital assets, but it also comes with some risks. For instance, the versatile nature of digital currencies means that their values change frequently. If the value of your collateral drops, it might not be enough to cover the assets you borrow. This presents a problem for the DeFi protocols, and that is why they use an over collateralized basis. You will not borrow assets that are the same value as your assets; the borrowed value has to be lower than what you put up as collateral.

Price oracles:

Another essential factor to note with lending protocols is that they tend to offer their tokens to borrowers; however, they also allow the use of different types of assets to appeal to a wide range of users. They have to know the market prices of those assets, and that is where the price oracles come in. The oracles feed the market prices’ protocols, which makes them significant factors to pay attention to in a DeFi protocol. It’s therefore advisable that you pay attention to these price oracles and understand how they work before proceeding to borrow from any protocol.

Interest rates:

Decentralized finance lending uses the same procedures as traditional banks when it comes to interest rates. You can choose between simple interest and compound interest, but the interest calculations on the protocols are different from banks. The protocols depend on several factors, such as liquidation, borrowing, and supply, to calculate interest rates. These factors are all dependent on user activities on the protocol. If no user activity is present, then the protocol cannot calculate the interest.

Liquidation:

In case you fail to pay your debt on the DeFi protocol, the system will allow someone else to pay that debt, and they will be given your collateral. The same applies to collateral that drops in value to the point that it cannot support the debt. In most cases, the protocol will try to liquidate your collateral as soon as it starts to drop in value. They may offer liquidation incentives or bonuses to the interested liquidator to prevent the asset’s value-form dropping too far. In case the collateralize asset value drops below the debt value, then you may not have to continue repaying the loan, which will make the protocol insolvent.

Conclusion

DeFi lending offers an excellent option for those dealing with digital currency trading to own their homes. Still, you can also use it to earn some profits by liquidating other users’ debts. At Xotic Properties, we can help you achieve your homeownership dream through a decentralized finance option. Whether you want to sell your home, buy a new home, or invest in real estate, our company is here to serve you.