Why you should use decentralized lending?

By storing your digital assets in the network, other traders can use them to generate higher profits on trading. In return, you receive income in the form of fees. Or you can also give yourself a loan and deposit your digital assets as collateral. This saves you from selling your assets when you need liquidity in your local currency.

How can you generate income with lending?

Traders who trade in short periods of time often use leverage trading to leverage their risk and thus generate higher profits. To do this, they usually borrow these assets from a traditional exchange, which the exchanges then take from the users who store their assets there. For this, you usually do not receive any revenue.

In the fully decentralized area, such incentives must be created so that investors make their capital available for this purpose. A smart contract consisting of code is used to ensure that the investors cannot lose their assets and at the same time receive the fee as income.

In order for you to receive such fees, you put a portion of assets into the smart contract for a fixed period of time and receive a fixed interest rate. At the end of the period, e.g. 4 weeks, your assets are movable again and you have received profits from the lending.

How does lending work in a smart contract?

The smart contract has contract rules set in its code that all participants must adhere to. Centralized exchanges also use such services provided by decentralized solutions. They borrow the capital from the contract participants who provide liquidity and issue a kind of bond in return in the form of a token. This token itself, in some cases, also has a value that can be traded.

The bond is a right to receive those assets plus the fees.

What risks do you face when lending?

A risk can be the price fluctuation of the asset itself. Because in the time in which you allow a loan, the good can not be sold or moved by yourself. If a situation arises in which you would like to sell quickly, you have no choice but to wait until the loan is completed.

Another risk is the total non-payment on the part of the lender. It is comparable to the usual risk in peer-to-peer lending from the traditional financial sector. As a rule, the platform that offers the loan must inform you about how they have secured themselves against risks. Here you have to decide for yourself whether you are willing to accept such risks and the collateral.

An automatism like a smart contract is mostly used as an intermediary here. However, the provider itself is responsible for the ultimate absorption of the risk. The options here are very different and vary depending on the platform.

How can you lend on digital assets yourself?

As mentioned at the beginning, you can also lend on your own assets. This is also a way in the traditional financial world to save you from liquidating all your assets due to a financial shortage.

If you want to leverage your risk, you can borrow against your assets and use the capital to buy more assets. This is used to achieve sometimes incredibly high returns. But it also increases risk tremendously. In the field of decentralized finance, this is called yield farming.

Yield farming is sometimes very complex, opaque and risky and will be discussed separately.