With over $13 billion in total value locked, decentralized finance has truly shaken the crypto world in the last year. It has provided a new way to profit from the crypto market.
Meanwhile, DeFi right now is only a niche trend with a gigantic potential to start a revolution in the business loan market. In order to grow out of diapers, DeFi desperately needs to be connected with real-world assets and exist in an environment where it can be used by real businesses, corporate clients, etc.
As a concept, DeFi truly looks like a win-win solution for those who already hold crypto, as they finally get to have some passive income from incentivization mechanisms and yield farming, and for borrowers, as they can benefit from a loan with terms that no traditional venue can offer.
Volatility and over-collateralization
However, there are several problems with DeFi that need to be addressed urgently. The first major drawback for all parties involved is over-collateralization to account for price volatility.
In most cases, protocols require borrowers to collateralize their loans at a minimum of 150% of the value of the loan. So, let’s say you want to borrow $100. That means you would have to collateralize your loan with a minimum of $150. Therefore, if your collateral drops below the $150 point in value, your loan would then be subject to a liquidation penalty.
