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)