On-Chain Lending refers to the provision and acquisition of cryptocurrency loans executed and settled entirely on a public blockchain, utilizing smart contracts to automate terms, collateral management, and interest accrual. Its purpose in crypto investing is to facilitate decentralized finance (DeFi) capital markets, allowing participants to earn yield on their digital assets or borrow against them without intermediaries, thereby increasing capital efficiency and access to liquidity within the crypto ecosystem.
Mechanism
The operational process involves a borrower depositing crypto collateral into a smart contract, which then releases a specified loan amount, typically in stablecoins or other cryptocurrencies. The smart contract automatically manages the collateral-to-loan ratio, liquidating collateral if its value drops below a predefined threshold. Interest payments and loan repayment are also handled programmatically by the smart contract, ensuring transparent and immutable execution of loan terms.
Methodology
The strategic approach focuses on disintermediation and transparency, leveraging blockchain’s immutability and programmability to create trustless lending markets. It applies principles of decentralized autonomous organizations (DAOs) and risk parameterization within smart contracts to govern lending pools and collateral requirements. The methodology provides a permissionless and globally accessible financial service, fundamentally altering traditional credit markets by relying on cryptographic security and economic incentives rather than legal agreements.
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