By Alamira Jouman Hajjar, Research & Editorial Manager, IOV Labs
This article is a part of IOV Labs’ series focused on helping newcomers to the world of Web3 understand the value of decentralized finance. Read on to explore how crypto loans promote financial inclusion, pros and cons, and top providers in the Latin America space.
Download the in-depth report to explore the LATAM lending landscape and understand the gaps and opportunitiesDownload The Report on The Rise of Digital Lending in LATAM
Access to basic financial tools and services remains a challenge for a large portion of the global population, especially within Latin America. The region faces a large informal economy where half of the workforce operates outside the traditional banking system. This lack of access to banking services, credit facilities, and even basic accounts can severely limit financial opportunities for individuals earning income in local currencies.
This is where decentralized finance (DeFi) comes into play. DeFi loans, specifically, offer an innovative solution to those underserved by traditional banking systems.
In this article, we’ll delve into the world of DeFi lending, exploring the pros and cons of crypto loans, and discover some of the top DeFi lending platforms making strides in the space.
Read our quarterly report on DeFi lending to explore the LATAM lending landscape and understand the gaps and opportunities.Download The Report on The Rise of Digital Lending in LATAM
What is a DeFi loan and what are its benefits
DeFi lending is where cryptocurrency is used as collateral to take out a decentralized loan on the blockchain. And due to the decentralized nature of the blockchain, DeFi loans are reshaping the financial landscape and opening doors for more and more people to enter the financial ecosystem.
Let’s take a closer look at the benefits they offer:
1. Financial inclusion
The leading benefit of DeFi loans is their potential to bring the world closer to true financial inclusion. There are billions of people globally who are classified as ‘unbanked’ or ‘underbanked.’ They simply don’t have the means or freedom to access the financial tools and services many take for granted — including access to basic banking. DeFi loans provide people in these financially underserved regions with a way to borrow and invest money — helping to boost economic growth and reduce poverty.
2. Lowering barriers
Traditional loans often require a good credit score, a steady income, and a pile of paperwork. But with DeFi loans, all you need is some crypto. Approvals typically have less identity verification and KYC requirements, making DeFi loans accessible to anyone, anywhere in the world.
3. Cheaper & faster
Crypto loans have an average annual interest rate of 2-4% with significantly high borrowing limits based on the token you’re borrowing and the platform you’re using.
Moreover, DeFi loans can cut out many of the costs associated with traditional lending. Without the need for credit checks or paperwork, users can take out loans for any amount with just a few clicks. This results in lower fees, lower interest rates, and far faster settlement times.
4. Decentralized infrastructure
The decentralized nature of cryptocurrencies enables multiple, everyday people to contribute to the Liquidity Pool and earn interest on their assets, providing more opportunities for both lenders and borrowers to benefit from peer-to-peer loans without a centralized authority cutting their piece.
Risks Of DeFi Loans
While DeFi lending holds significant promise, it’s important to remember that it still comes with its share of risks. And one of the most important risks associated with crypto lending is market volatility:
Crypto loans involve using collateral (e.g. Bitcoin, Ethereum) to receive cash (e.g. stablecoins, cryptocurrencies, fiat). The risk arises if the value of the collateral drops significantly, then the borrower will need to provide additional collateral or face automatic liquidation.
To mitigate the risk of collateral price drops, users can rely on their savings and/or stablecoins as collateral to avoid collateral volatility.
Loan providers and platforms, on the other hand, need to implement security measures that protect against market manipulations and better manage volatility risks.
Top DeFi Lending Platforms
There is an abundance of DeFi loan platforms currently operating in the crypto world — each offering different opportunities and features for its users. Here’s a quick look at some of the popular lending protocols:
Clave – A key player in the DeFi lending space, Clave is making waves with its approach to crypto loans driven by innovation and inclusion. They offer a variety of loan products that allow consumers to access credit in minutes.
Aave: One of the original DeFi lending platforms and the first major platform to use open-source Liquidity Pools for DeFi loans. Accessible on multiple blockchain networks, Aave’s features include flash loans, rate-switching, and the ability to choose between fixed and variable interest rates.
Sovryn: Sovryn is a Bitcoin-based DeFi platform, built on Rootstock blockchain, that allows users to take out zero-interest loans using their Bitcoin as collateral. Like many decentralized lending applications, it requires no credit checks or sign-up. The platform is part of the growing DeFi ecosystem on Bitcoin, a significant shift from the Ethereum-dominated DeFi landscape.
Galileo – A multi-chain protocol that allows consumers and businesses to create, launch and scale lending programs with market-tested APIs.
Tropykus: A Latin America-based DeFi lending platform, built on Rootstock blockchain, that allows users to earn interest on deposits and take out loans using their crypto assets. Tropykus aims to bring financial inclusion to unbanked and underbanked communities within LATAM.
Learn how businesses are integrating crypto loans in their offering
Eager to dive deeper? The RIF Lending Report is brimming with valuable insights into how businesses can leverage crypto loans to help expand financial services to people underserved by conventional banking. The report explores how crypto loans are revolutionizing business models and their potential to help people underserved by conventional banking.
Check out the RIF Crypto Lending Report nowDownload The Report on The Rise of Digital Lending in LATAM