DeFi and Credit on the Blockchain: Why Loans Are Better When They're Decentralized

While DeFi is covering a wider range of areas - from remittances to derivatives and investments - its most promising sector involves credit and lending.

At the same time, users need to be careful when using early stage and untested DeFi platforms and services, just as they need to be aware that not all DeFi systems are truly decentralized.

Why lending is better when it's decentralizedNonetheless, as young as DeFi lending may be, there are many other platforms besides MakerDAO and EOS REX that are offering credit via decentralized means.

As Bloqboard's head of growth, Nick Cannon, explained to Cointelegraph, such transparency is a big part of the reason why decentralized lending and DeFi more generally is likely to take off.

As both Palayer and Cannon suggest, the decentralized and geographically nonspecific nature of blockchain means that DeFi lending is more open to a wider market of customers than centralized alternatives.

Nexo claimed to have issued $300 million in loans to over 170,000 users in the seven months leading up to March, while Trenchev also reports that the use of blockchain and crypto-based collateral means that loans can be made extremely flexible for users, both in terms of the amount borrowed and in terms of the conditions attached to lending: "There is no fixed repayment schedule, no strict maturities. As long as you have sufficient collateral to secure your borrowed funds, you have the flexibility to repay your loans at any time with cash or crypto assets."

Secondly, in many cases, the decentralized, blockchain-based nature of DeFi lending systems allows companies to offer credit at a lower cost, something that obviously makes obtaining loans more affordable for a wider group of people.

Feeding into the openness of decentralized lending platforms is the burgeoning area of blockchain interoperability and atomic swaps, which promise to give users more options when taking out loans or lending crypto.

More fundamentally, decentralized lending won't succeed and make significant headway until the industry pinpoints - and builds itself around - gaps in the credit and loans market it's well-positioned to solve.

While there is certainly a demand for loans that don't require a credit history, the fact that most no-credit DeFi platforms ask for crypto as collateral would mean that the success of such platforms is predicated on the general and widespread adoption of cryptocurrency.