In the traditional financial market, banks play a crucial role in providing financial services, asset management, and fostering economic growth. They not only serve as custodians of money but also act as intermediaries in financial transactions, lending, and providing interest rates to depositors. The methods of borrowing and lending have existed for a long time in history, enabling businesses and individuals to access capital immediately. However, traditional markets face numerous drawbacks such as strict regulations and centralization.

In the DeFi market, these issues have been addressed. Borrowers no longer need to rely on trust in lenders or prove income to access capital. Imagine living in a world where you can freely engage in activities like earning interest or borrowing assets with just a few simple steps, all automated. There are now numerous Lending & Borrowing platforms in the DeFi market such as Aave, Compound, Solend, Kamino, enabling universal access to financial markets.

What Is Cryptocurrency Lending & Borrowing?

This is one of the fundamental activities in the DeFi market, akin to traditional lending and borrowing activities. It allows users to lend their assets to others for a specified period and predetermined interest rate. After this period, they receive back their principal plus interest.

For example, if you have $100 idle and want to earn from it, you can lend it to someone who needs it for their activities. In return, you earn interest over a specified period, such as 10%. At the end of the term, you receive back $110. In DeFi, you can deposit funds or borrow them on platforms like iLoop, Kamino, Marginfi, and Solend.

For borrowers, they need to collateralize a certain amount of assets to secure their loans. This process is similar to pledging assets in traditional bank loans but instead uses a diverse range of digital assets as required by the platform.

Key Forms of Lending in DeFi:

The robust development of the DeFi market provides various opportunities and mechanisms for users to easily access assets. Despite challenges, platforms maintain community interest, especially Solana post-FTX bankruptcy. Currently, the three main forms in the market are:

1. P2P: Direct lending between two parties without a third-party intermediary. Specific terms are agreed upon, and loans are executed via smart contracts if both parties meet the conditions.

2. Over-Collateralized: The most common form where collateral exceeds the loaned assets. This method safeguards the lender's assets, but market volatility can lead to losses for lenders.

3. Under-Collateralized: Contrary to over-collateralized, this form requires less or no collateral to access loans. While seemingly impractical, platforms operating this way primarily lend to highly reputable organizations, with limited projects using this method.

Important Metrics:

Interest Rate: This is the most important index in the Lending platform. Whether a platform can attract deposits depends on its Interest Rate; platforms compete on Interest Rates to attract funds. Simply put, this is the interest that lenders receive after a certain period.

Lending Time: The lending period is calculated from the start to the end of the loan, when users receive both the principal coin/token and interest. During this period, the lender's coins/tokens are locked. Typically, lenders can choose their preferred lending period. Specifically, lending periods can be 7 days, 14 days, 28 days, 30 days, and up to 90 days. During the lending period, users are not allowed to withdraw their funds until the borrower's term expires.

Lending Asset: This refers to assets that users can lend and borrow. Different platforms may support different assets. It's important to note that different assets carry different risks.

Lending Total Valued Lock: This is the total amount of locked assets. The more assets are locked, the more trustworthy and popular the lending platform is perceived to be in DeFi. A high Total Valued Lock (TVL) indicates that many users are willing to stake their assets in the platform for lending or liquidity provision, reflecting trust in the platform's security and profitability.

Loan-to-Value (LTV) This is an important index used to determine the amount a borrower can borrow, measuring the percentage ratio of the loan amount to the collateral asset value. Traditional lenders like banks evaluate borrowers based on credit scores and repayment ability. Unlike traditional lenders, lending platforms do not evaluate users; access is open to anyone. LTV is pre-set for each type of asset, varying with different risk levels.

For example, an LTV of 80% means you can borrow up to 80% of your collateral asset's value. If you collateralize $1000, you can borrow up to $800.

About iLoop

iLoop is a next-generation Lending & Borrowing platform focused on the Liquid Staking market within the Solana ecosystem, offering solutions to optimize LST stakers' holdings directly on a single platform.

Join us on this exciting journey with iLoop. We're committed to constantly improving and developing our services to deliver the best experiences for the community in the Liquid Staking field on Solana.