DeFi offers a safe and secure alternative lending ecosystem

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By Vikram R Singh, Founder and CEO, Antier

Online bank­ing and the var­i­ous web and mobile app-based dig­i­tal finan­cial plat­forms have
sure­ly made the consumer’s life con­ve­nient. While the ease of access to your mon­ey and
oth­er finan­cial ser­vices, includ­ing loans, at the snap of a fin­ger can­not be over­stat­ed, this
con­ve­nience comes with the caveat that “not all that glit­ters is gold”.

A pletho­ra of instant loan apps flood­ing the mar­ket comes with a huge risk, the State Bank of India warned in its recent alert to cus­tomers. “Please refrain from click­ing on sus­pi­cious links or giv­ing your infor­ma­tion to a com­pa­ny pos­ing as a bank or finan­cial com­pa­ny, it tweet­ed. If the country’s pre­mier finan­cial insti­tu­tion has come on a pub­lic plat­form to high­light this issue, it does mer­it a deep­er thought.

It is imper­a­tive to first under­stand the modus operan­di of app-based loan ser­vices and how
they can do more harm than good. Instant loan apps promi­nent­ly adver­tise their ser­vices on
social media to attract the tar­get audi­ence. Once you down­load the per­son­al loan
appli­ca­tion on your mobile, you need to pro­vide app per­mis­sion for access to your con­tacts,
mes­sages, and images. With much of your data secured at cen­tral loca­tions, your data
secu­ri­ty and pri­va­cy are at risk, leav­ing you sus­cep­ti­ble to black­mail and hacking.

Since these apps are fraught with per­il, why not ban them in the first place, you might be
com­pelled to think. But opt­ing for this easy way out might not be advis­able, con­sid­er­ing the
afford­able solu­tions that they offer. Exer­cis­ing utmost cau­tion, we should first under­stand the risks involved and then work towards iden­ti­fy­ing a solu­tion because nei­ther can instant app- based bor­row­ing and lend­ing plat­forms are wished away nor can the util­i­ty of the authen­tic ones for the com­mon man be denied.

The answer lies in alter­na­tive lend­ing plat­forms based on tech­nolo­gies that are secure and
trans­par­ent. Decen­tralised finance (DeFi) is one such inno­va­tion that makes it pos­si­ble to
have finan­cial ser­vices and appli­ca­tions on a decen­tralised net­work. Being a mon­e­tary
sys­tem built on a pub­lic blockchain, DeFi does not have to rely on any cen­tralised finan­cial
inter­me­di­aries. As a result of the decen­tralised struc­ture of DeFi pro­to­cols run on open-
source soft­ware, DeFi not prone to the risks of tam­per­ing, dis­as­ters, and fail­ures.
Lead­ing mar­ket research and strat­e­gy con­sult­ing firm Emer­gen Research has pro­ject­ed
that rid­ing on these advan­tages, the decen­tralised finance plat­forms mar­ket will grow to
US $507.92 bil­lion by 2028 at a CAGR of 43.8%.

But before we go into what DeFi does, it is impor­tant to under­stand what it is all about. A
net­work of finan­cial apps based on blockchain tech­nol­o­gy, DeFi an open-source, trans­par­ent and per­mis­sion-free finan­cial ser­vice ecosys­tem that is avail­able to every­one and oper­ates with­out any cen­tral author­i­ty. The users, there­fore, have com­plete con­trol over their assets, inter­act­ing with this ecosys­tem through peer-to-peer (P2P), decen­tralised appli­ca­tions (DApps).

DeFi lend­ing and bor­row­ing involves quick lend­ing and bor­row­ing of dig­i­tal assets with­out
the assis­tance of a third par­ty. More con­ve­nient, read­i­ly avail­able and extreme­ly trans­par­ent, DeFi lend­ing plat­forms enable com­mu­ni­ty lend­ing among net­work mem­bers, thus doing away with the need for mid­dle­men by way of self-reg­u­la­to­ry smart con­tracts for loan dis­bur­sal. Since smart con­tract codes record­ed on blockchain are open for every­one to read and archives of trans­ac­tions are also read­i­ly acces­si­ble, DeFi stands out in uphold­ing user trust with its utmost openness.

The inter­est paid by bor­row­ers is used to pay inter­est to lenders in keep­ing with a pre­de­fined lend­ing pro­to­col, and only a small frac­tion of the earn­ings goes to the plat­form as fee. In this win-win propo­si­tion for both that allows long-term cred­i­tors to fetch bet­ter returns through lend­ing rates and debtors to obtain cheap­er loans, any­one can reg­is­ter as a bor­row­er or lender by sim­ply attach­ing a cryp­to wallet.

The work­ing of DeFi lend­ing and bor­row­ing plat­forms is also as smooth and effort­less as it
can get. Trans­ac­tions are com­plet­ed almost instan­ta­neous­ly through auto­mat­ed smart
con­tract pro­ce­dures with­out any inter­me­di­aries and cum­ber­some doc­u­men­ta­tion. After
con­nect­ing your wal­let to a DeFi plat­form and sub­mit­ting a loan request, you can obtain
secure loans in lieu of dig­i­tal cur­ren­cies as secu­ri­ty. After both par­ties agree to a par­tic­u­lar
inter­est rate, the loan is trans­ferred into the borrower’s account. As in the case of
con­ven­tion­al loans, bor­row­ers can repay the loan on a month­ly basis. Once the loan has
been ful­ly repaid, the cred­i­tor returns the col­lat­er­al. An alter­na­tive to these cryp­to loans is
the use of debtors’ fiat cur­ren­cies as secu­ri­ty to acquire cryp­to assets.

The DeFi sec­tor, which offers a range of finan­cial ser­vices, includ­ing pay­ments, trad­ing,
lend­ing, and bor­row­ing, may be at a nascent stage in India, but the advan­tages it has over
con­ven­tion­al financ­ing will make way for its spec­tac­u­lar growth in years to come. Offer­ing
more con­trol over dig­i­tal hold­ings free of poten­tial vul­ner­a­bil­i­ties and facil­i­tat­ing nego­tiable
inter­est rates with the high­est degree of account­abil­i­ty as a result of its decen­tralised
struc­ture based on open blockchain, DeFi has every­thing going for it. Recent devel­op­ments in the Indi­an finan­cial ecosys­tem also point in this direction.

The RBI has recent­ly launched the pilot phase of the cen­tral­ly-con­trolled, con­ven­tion­al data­base infra­struc­tures for CBDC (cen­tral bank dig­i­tal cur­ren­cy). The CBDC pilot launched by the RBI in the retail seg­ment has com­po­nents based on blockchain tech­nol­o­gy. While the CBD­Cs oper­ate on autho­rised (pri­vate) blockchain, the cryp­tocur­ren­cies oper­ate on a per­mis­sion­less (pub­lic) blockchain.

The for­mer is cen­tralised, where­as the lat­ter is not. Though this puts cryp­tocur­ren­cies and CBDC on oppo­site sides of the blockchain spec­trum, there is a mas­sive scope for co-exis­tence and inter­de­pen­dence. CBD­Cs could be a great way to bridge the gap between mul­ti­ple cryp­tocur­ren­cies, and both can co-exist togeth­er. Also,
being the cen­tral bank, RBI has the right to play safe and do its due dili­gence before
adopt­ing of any tech­nol­o­gy, which could be the case with DeFi lend­ing ecosystem.

Recent devel­op­ments in the Indi­an finan­cial ecosys­tem are also mov­ing in this direc­tion. The pilot phase of the cen­tral­ly-con­trolled, con­ven­tion­al data­base infra­struc­ture for Cen­tral Bank Dig­i­tal Cur­ren­cy (CBDC) launched by the RBI in the retail seg­ment has com­po­nents based on blockchain tech­nol­o­gy. While CBDC oper­ates on autho­rised (pri­vate) blockchains,
cryp­tocur­ren­cies are based on per­mis­sion­less (pub­lic) blockchains. While autho­rised blockchains are cen­tralised, pub­lic blockchains are not. Though this puts cryp­tocur­ren­cies
and CBDC on oppo­site sides of the blockchain spec­trum, there is mas­sive scope for
coex­is­tence and inter­de­pen­dence. CBDC can be a great way to bridge the gap between
mul­ti­ple cryp­tocur­ren­cies, and both can coex­ist. Being the cen­tral bank, the RBI has every
rea­son to play safe and do its due dili­gence before adopt­ing of tech­nolo­gies like DeFi
lend­ing.

(The writer is the Founder and CEO of Antier, a lead­ing blockchain devel­op­ment com­pa­ny)

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