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April 11, 2024

The Evolution of DeFi Lending and Borrowing

Key Points
  • DeFi is transforming finance with more transparent and secure services.
  • Key innovations in DeFi enhance its efficiency and accessibility.
  • Hatom Protocol showcases DeFi's advantages over traditional banking.


Decentralized Finance, commonly known as DeFi, has ushered in a revolutionary era in the financial sector, challenging the traditional banking paradigms with its innovative approach. At the heart of this transformation are DeFi lending and borrowing platforms, which have become pivotal in demonstrating how finance can be reimagined in a decentralized environment. Unlike conventional financial systems, DeFi offers enhanced security, transparency, and efficiency, setting new standards in how we perceive and engage with financial services.

This blog post delves deep into the evolution of DeFi lending and borrowing, showcasing the significant strides these platforms have made in offering more sophisticated and accessible financial services. From pioneering risk assessment methodologies to novel collateralization practices and dynamic interest rate models, DeFi is not just keeping pace with traditional banking but is often outstripping it in innovation and user empowerment.

As we navigate through the intricacies of DeFi's advancements, we'll uncover how these platforms have become more than just alternatives to traditional banks — they are harbingers of a financial revolution, reshaping the landscape of lending and borrowing.

The Birth and Growth of DeFi Lending and Borrowing

In the early days, platforms like MakerDAO and Compound emerged as trailblazers, introducing the world to the concept of decentralized lending and borrowing. These platforms laid the foundational stone, demonstrating that it was possible to lend and borrow without the intermediary of a traditional bank, thereby reducing costs and increasing efficiency.

  • MakerDAO: Pioneered the concept of over-collateralized loans, introducing a new way of lending and borrowing in the cryptocurrency space.
  • Compound: Revolutionized DeFi lending by introducing a liquidity pool model, which allowed users to earn interest on their deposits while providing liquidity to borrowers.

As these platforms gained traction, the DeFi sector witnessed exponential growth. The total value locked (TVL) in DeFi protocols surged, reflecting an increasing trust and interest from the crypto community and beyond. This growth was not just numerical; it represented a paradigm shift in how people viewed and engaged with financial services.

The evolution of DeFi lending and borrowing also saw the introduction of more sophisticated risk assessment mechanisms, diversification of collateral types, and the development of dynamic interest rate models. These innovations have made DeFi more accessible and attractive, broadening its appeal beyond the early adopters and crypto enthusiasts.

  • Risk Assessment: DeFi platforms began to incorporate more advanced algorithms and data analytics to assess borrower risk more accurately, reducing the likelihood of defaults and enhancing platform security.
  • Collateralization: The range of assets accepted as collateral expanded beyond traditional cryptocurrencies, including tokenized real-world assets, NFTs, and more, thereby increasing the avenues for borrowing.
  • Interest Rate Models: DeFi protocols started implementing variable interest rates based on supply and demand dynamics, offering more competitive rates compared to the rigid structures of traditional banking.

The growth of DeFi lending and borrowing is a clear indicator of its success in providing a viable, efficient, and user-centric alternative to traditional financial services.

Innovations in DeFi Lending and Borrowing

The world of DeFi lending and borrowing is a hotbed of innovation, constantly evolving to offer more secure, transparent, and efficient financial services. This section delves into the key advancements that have set DeFi apart from traditional financial institutions, highlighting how these innovations contribute to a more inclusive and dynamic financial ecosystem.

  • Advanced Risk Assessment: In traditional banking, risk assessment often relies on credit scores and historical financial data, which can exclude many potential borrowers. DeFi, however, uses blockchain technology to introduce more nuanced and real-time risk assessment tools. For instance, platforms now employ algorithms that analyze transaction histories directly on the blockchain, offering a more dynamic and comprehensive view of a borrower's financial behavior.
  • Innovative Collateralization Practices: Collateralization in DeFi has transcended beyond conventional assets. Initially, DeFi lending required over-collateralization with cryptocurrencies, but now, the scope has expanded. Innovations include:
    • Multi-asset collateral: Allowing borrowers to leverage a diversified portfolio of assets as collateral.
    • Non-fungible tokens (NFTs): Some platforms have begun accepting NFTs as collateral, opening new avenues for borrowers and creating a crossover between various sectors of the crypto market.
  • Dynamic Interest Rate Models: Unlike the fixed interest rates often seen in traditional banking, DeFi platforms use algorithmic models to adjust interest rates based on market dynamics. This approach ensures more competitive rates for borrowers and fair returns for lenders, aligning closely with the principles of supply and demand. For example, when there's high demand for a particular asset, interest rates rise, incentivizing more lenders to provide liquidity.

These innovations underscore the agility and forward-thinking nature of DeFi lending and borrowing platforms. By continuously pushing the boundaries, DeFi is not only challenging the status quo of the financial industry but is also setting new standards for what's possible in lending and borrowing.

Case Study: Hatom Protocol

Hatom Protocol serves as an exemplary success story in the DeFi lending and borrowing space, operating on the MultiversX blockchain. It's recognized as the first liquidity hub on MultiversX, significantly advancing the DeFi landscape by integrating pivotal protocols such as a Lending Protocol and a Liquid Staking Protocol. This suite of products has not only augmented the MultiversX DeFi ecosystem but also acted as a catalyst for attracting new capital, thereby strengthening network security and stability while fostering the emergence of new opportunities and products.

Hatom's approach to liquidity involves targeting a substantial portion of the EGLD (the native MultiversX network token) circulating supply that is staked. By leveraging its Liquid Staking module, users who stake through Hatom's smart contracts receive a reward-bearing version of EGLD, which can be used in other DeFi applications, accruing staking rewards and offering redeemable flexibility without locking times​.

Moreover, Hatom's lending and borrowing protocol enables users to access liquid capital while maintaining their positions via collateralized on-chain loans. The platform supports a variety of significant ecosystem tokens and stablecoins like USDC and BUSD, broadening the scope of its lending services. Additionally, Hatom has introduced an overcollateralized decentralized stablecoin, USH, with an independent monetary policy to further extend its lending protocol's offerings, thereby creating additional revenue streams for the ecosystem and its token holders​.

The Hatom Protocol is an illuminating example of how DeFi platforms can create multifaceted financial ecosystems that offer more flexibility, inclusivity, and innovation compared to traditional banking systems.

Discover our role in developing Hatom Protocol on MultiversX in our portfolio.

Macarena López Morillo
Head of People
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DeFi vs. Traditional Banking

DeFi lending and borrowing platforms have introduced a paradigm shift in the financial landscape, challenging traditional banking with their innovative approaches. This section provides a comparative analysis, underscoring the distinct advantages of DeFi over conventional financial systems in terms of transparency, security, and efficiency.

Transparency: One of the hallmark features of DeFi is its inherent transparency. Every transaction on a DeFi platform is recorded on the blockchain, making it publicly accessible and immutable. This level of transparency is unparalleled in traditional banking, where transactions and decision-making processes often occur behind closed doors. In DeFi, users have the ability to audit transactions, track loan distributions, and monitor platform liquidity in real-time, fostering a trustless environment where information is open and verifiable by anyone.

Security: While traditional banks rely on physical and digital security measures that are susceptible to human error and cyber-attacks, DeFi platforms leverage blockchain technology to enhance security. Smart contracts automate transactions and enforce terms without the need for intermediaries, reducing the risk of fraud and errors. Moreover, the decentralized nature of blockchain mitigates the risks associated with central points of failure, making DeFi platforms inherently more resistant to attacks and operational risks.

Efficiency and Inclusivity: DeFi platforms democratize access to financial services, breaking down barriers associated with traditional banking. Unlike banks, which often have stringent requirements for lending and borrowing, DeFi platforms provide more inclusive opportunities, catering to a global audience without the need for a traditional credit history or geographical proximity to financial institutions. This inclusivity, combined with the efficiency of automated smart contracts, results in faster transaction times, lower fees, and a more user-centric financial ecosystem.


The journey through the evolution of DeFi lending and borrowing reveals a dynamic and transformative landscape, one that is continually reshaping the contours of the financial sector. As we've explored, from its inception to the groundbreaking innovations and the comparative edge over traditional banking, DeFi has proven to be a formidable force in democratizing financial services.

The success stories, like that of Hatom Protocol, underscore the potential to create robust, efficient, and inclusive financial ecosystems. These platforms are not merely alternatives but are emerging as the preferred choice for many, offering transparency, security, and opportunities beyond the reach of traditional financial institutions.

As DeFi continues to evolve, it beckons us to a future where financial services are more accessible, equitable, and aligned with the needs of a digital-first generation. The implications of this evolution are profound, signaling a shift towards a more decentralized, user-empowered financial landscape.

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