Decentralized finance: How do you choose a DeFi lending platform?
Decentralized Finance (DeFi) has successfully removed the need for a centralized entity such as bank in order to access loans, investments, and savings. Through the various DeFi platforms, DeFi users have the power to manage their own digital assets and become their own bankers. With the help of smart contracts, DeFi lending platforms enable users to transact from peer-to-peer, eliminating the need for a middleman.
As DeFi lending continues to gain popularity as an alternative credit source with a large liquidity pool, more DeFi lending platforms are being developed to tap into this market. To keep up with the competition, DeFi lending developers can use some of these features to stand out and make their platforms successful.
- Rate switching.
When creating DeFi lending, it is important to note that the crypto market is very volatile and it is important to give users the flexibility to protect themselves against this. This can be done by adjusting interest rates and giving borrowers the option to switch between stable and various interest rates.
2. Lending limits.
Platforms that offer no minimum lending or maximum limit are more lucrative as it provides investors and borrowers the flexibility of risk.
3. Flash loans.
These are time-limited loans offered to borrowers without any collateral. If the borrower fails to repay the loan it gets reversed automatically. They are valid as long as the liquidity returns to the pool within the one transaction block. Flash loans are popular because they are instantaneous and require no background check and are also recorded and secured by the smart contract. They encourage more borrowers to the platform.
It is important for you as a borrower or investor to do your research on DeFi lending platforms before diving into parting with your funds. Here are a few things you should consider before choosing a DeFi lending platform to lend or borrow from.
- Supported coins
When choosing a DeFi lending platform, it is important to check whether the assets you want to borrow or lend are available on the platform. A platform like Moolah Market only supports Celo making it hard for users with digital assets such as Solana crypto as collateral access loans.
2. Interest rates
When checking which DeFi lending platform to use, take note of the interest rate for the coin you choose. You might find a platform such as Nexon offering a 36% interest rate on crypto assets and 17% on stablecoins and Binance offering 100% on crypto interest rates and over 19% on stablecoins.
3. Annual Percentage Yield (APY)
This is the money you earn from depositing to the liquidity pool of the platform. APYs vary with the platform and the form of assets deposited. The market value affects the token being lent out in either a positive or a negative way. If the value of the token increases, you will get a higher APY yield, and if the value of tokens decreases you can get back less yield than you invested. It’s important to explore whether the APYs change without notice. You will find a platform such as DeFi swap that offers an APY of up to 75% when you lock up a DeFi coin for 365 days and 30% when you lock up on a 30-day term.
4. Terms of service
Each platform has its own set of terms and conditions when it comes to depositing and withdrawing of assets. Some platforms such as Aqrue charge a $20 fee on crypto withdrawals. Also, check the lock-up duration. Some platforms like DeFi swap offer 30 day to 1-year duration while others offer a fixed duration. Another term you should be on the lookout for is the minimum loan limit to borrow or lend out. This might affect your capacity to take risks. Choose what works for you best.
5. Safety and security level
The security of the platform holding your assets is very important as it protects your assets from hackers and scammers. When choosing a DeFi lending platform, check their security feature and if there is the availability of an extra layer security feature. A platform such as YouHodler has a unique 3-factor authentication that allows investors with over $10,000 to block crypto withdrawals and to add an extra layer of protection.
The DeFi lending platforms are highly competitive with developers coming up with more lucrative features for borrowers and lenders. Here are the top 3 lending platforms that are dominating the DeFi lending ecosystem.
AAVE
This is a well-developed DeFi lending protocol offering more than $9 billion locked out liquidity pool in 7 networks and 13 markets. The platform offers different yield and interest rates for each token, and the rates tend to vary based on the network. Users have more flexibility with the choice of either a fixed or a floating interest rate. Some of the features it offers are the option of flash loans that give borrowers more flexibility and make the platform a top preferred choice for borrowing. As a borrower with collateral, you could get loans of up to $250,000 from the developers’ community in USDC tokens
Compound
The Compound protocol offers a variety of cryptocurrencies that you can deposit and borrow from allowing borrowers and lenders the flexibility of token options. The protocol also has its own token that returns good yields while lending to provide liquidity. One of its features is a live price feed that helps you track prices on the platform based on availability o liquidity. Compound allows you to integrate different interfaces with its protocol. What makes this protocol stand out is that lenders earn interest in the same token that was offered to the liquidity pools, which is rare in other platforms and its liquidity pool makes it simple to lend to borrowers.
MakerDAO
This protocol allows crypto users to lend out their tokens to generate DAI, a stablecoin pegged to the US dollar. The use of stablecoin makes it easy for lenders to know their returns easing their worry about the volatile market. MakerDAO offers a flexible interest rate that is paid to lenders ranging from 0% to 8.75%. Once you open a vault on Maker, you can deposit up to 25+ crypto assets as collateral and have the choice to borrow Dai and hold on to it or purchase additional collateral to increase your exposure.
DeFi lending use case
Kotani Pay together with @Tukule Kwanza, SympliFi, UTU Technologies, and Mercy Corps Ventures, are enabling Medium to small market Enterprises(MSMEs) to access cheap and short-term capital through Buy now pay later(BNPL) through a newly launched pilot program. To access the BNPL, these vendors are first scored by UTU, a blockchain protocol that uses ordering history, demographic, and Mpesa to build credit worthiness.
The journey to access the BNPL starts with SympliFI, which is a DeFi lending platform that gets liquidity from a pool of lenders who are mostly oversea workers. This liquidity is converted to stablecoins and later to Kenyan shillings and sent to Kotani Pay who then disburses the funds to Kwanza Tukule where a BNPL payment is made to Tukule on behalf of the vendor when an order is placed.
Through DeFi lending, the pilot aims at testing new ways to fill the funding gap for MSMEs as DeFi lending offers, cheaper and easy access to the global liquidity pool. These opportunities for MSMEs empower them to grow their business.
At Kotani Pay, we take care of the KYC for your beneficiaries and provide a one-stop solution for crypto to fiat withdrawal. We also ensure that all beneficiaries have a Kotani Pay wallet where they can receive their distributed digital assets and through the Kotani Pay USSD code, withdraw directly to their mobile money in their local currency.
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