Decentralized finance lending: 5 changes to prepare for
Let’s look at the DeFi features that may require changes in established lending practices:
1. Geographical coverage and scale
A blockchain, by definition, is a shared ledger, and a shared ledger can be global in scale. The system providing the necessary replication and immutability of transactions requires that the nodes are geographically distributed and not controlled by a single entity. This means that DeFi applications running on a global network can be accessed by users worldwide. It is a marketplace always open for business, and participants can transact 24/7, giving lenders access to a global clientele and exploring new lending opportunities.
2. Turnaround time
Given the purely online nature of transactions, the time to make lending decisions is significantly compressed. Traditional ways of conducting due diligence that can take weeks to complete will not be efficient enough work in this marketplace.
3. Regulatory compliance
The financial services industry is very familiar with having service providers register and comply with local and regional regulations. While the good news is that financial service providers can extend their services beyond traditional geographic borders, compliance and regulatory requirements may exponentially increase.
4. Collateral management
Blockchain and DeFi will lead to financial transactions that deal with a new set of digital assets. As the tokenization of products and services in the “metaverse” environment grows, lending will bring in a new set of collateral that can be instantly authenticated and evaluated on the blockchain and thereby used as collateral. Another Blockchain concept of maintaining a digital “chain of custody” will also help devise new collateral management methods.
5. Enforcement
Blockchain and DeFi leverage smart contracts that can build a lot of measurement and intelligence into the contract, where predetermined, automated actions can take place based on the measurement and covenants of the contract. This capability will require a new way of thinking about lending contracts.
The future of banking and blockchain
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