What is DeFi lending and borrowing?

DeFi lending platforms allow users to put their cryptocurrencies on the network for lending in a trust less manner, that is, without delegates. A borrower can take out a loan using a decentralized network known as peer-to-peer lending. Furthermore, the lending technique allows the lender to profit from interest. Among all decentralized applications, DeFi has the fastest loan growth rate and is the most popular patron for locking crypto assets (DApps).

DeFi landing

How does DeFi lending work?

  • Clients may use DeFi loans to lend their crypto to a third party and earn interest on the loan. Banks have continuously used this system to its greatest potential. Currently, anybody may become a lender in the DeFi space. A loan provider can lend their assets to others and profit from the interest. Lending pools can help to facilitate this procedure.
  • Smart contracts allow clients to combine their assets and distribute them to borrowers. Different techniques to dispersing interests to financial investors exist; as a result, it is encouraged and worthwhile to spend time researching your interest kind. It’s the same for borrowers, as each pool will have its own approach for determining the best way to borrow.
  • To get a loan, the borrower needs to offer something more important than the loan sum. Smart contracts are utilized to store this amount of currency of equivalent value to the sum of the loan. Collaterals are accessible in wide assortments; any crypto token can be used to trade borrowed cryptocurrency. For instance, if a client needs to get one bitcoin, he’d need to store the cost of one bitcoin in DAI.

What advantages does DeFi Lending provide its customers?

  • The lending process is now moving at a faster pace: Digital lending measures have the advantage of being quick to process. Cloud-based help, fraud detection analytics, and AI calculations for appropriate loan conditions and risk variables are all offered by DeFi lending systems. Each of these advancements aids in the speeding up of the procedure. Lenders submit bids via e-contracts once the loan has been verified.
  • Permissionless: DeFi lending enables permissionless access. This means any person with a crypto wallet has access to DeFi applications created on Blockchain, regardless of their location and without any requirements of the minimum amount of funds
  • Transparency: Every transaction on the system is reported to the public Blockchain, which is then examined by each user on the network. This degree of transaction openness allows for productive data analysis and ensures that each user on the system has confirmed access.

What is DeFi Swap?

DeFi Swap was created as a new DeFi protocol to be the greatest location to swap and farm DeFi coins at the highest possible rate, while also providing an exceptional reward program driven by CRO. For participating to liquidity pools, Liquidity Providers (LPs) are highly compensated.

These are few main functions in the protocol:

  • Swap: Users can pay a 0.3 percent swap fee to switch between any two supported tokens.
  • Pool: Each liquidity pool consists of reserves of two ERC-20 tokens, and issues an ERC-20 pool token as proof of proportional ownership of the underlying reserves.

Tax Implications

If you lend your crypto or contribute it to a platform that supplies loans of crypto, you will be liable for taxation on whatever you earn from lending your crypto. Whether this lending income is treated as ordinary income (like income on salary) or as capital gains (gains from trading) depends on your DeFi platform.

Let Us See A Practical Example:

  1. YFI coin swapped for ZYFI: I deposit 1,000 YFI coins with a platform
  2. The platform gives me 1,200 ZYFI in return, for a certain period of time
  3. After 2 months I return 1,200 ZYFI coins to the platform and take back 1,200 YFI coins
  4. Interest income of 200 YFI

If you’re navigating the complexities of DeFi lending and require expert guidance on managing your cryptocurrency assets, consider leveraging the cryptocurrency consulting services offered by Kelly+Partners Accountants Burbank. With over 20 years of experience serving Burbank, CA, and the surrounding areas of Los Angeles County, our team specializes in forensic accounting and business management. Whether you need assistance in understanding the tax implications of DeFi lending or optimizing your financial strategies, our seasoned professionals are here to support you every step of the way.