How does it work?
Let's start with breaking down on how the lending business is working: In very simple terms it's possible to say that a person is willing to pay for something he wants to borrow. In the financial industry the borrowed asset is mostly money. Most of us will know about what we speak: loans, mortages, car leasings or whenever somebody borrows money and pays the lender for it. In traditional finance the lender is mostly a bank or another financial intermediary. Actually the bank is not lending out their own money, they are lending out the money of other clients and keep the biggest share of the generated interest for themselves. The lending business is one of the biggest and oldest businesses in the world and is here to stay forever.
In the last years different decentralized lending platforms showed us clearly that it is possible to run a successful peer-to-peer lending business on the blockchain, fully decentralized and trustless. But how does that work? In general it is pretty much the same as the normal lending business just without the financial intermediary in the middle of everything. By taking the bank out of the picture it is possible that a fair interest rate is found on the open market which is continuously adjusted to the market conditions. This makes it possible to have a fair and not manipulatable lending market.
Until DeFi.ch entered the market the interest rates for crypto deposits on the different available projects were pretty low. Let's have a closer look at the situation with Ethereum: The interest rates for ETH deposits were somewhere around 0.03% - 10% per year - speaking about decentralized and centralized platforms. While in the same time deposits for stablecoins like DAI or USDC generate interest rates between 3% - 25 % per year - depending on the risk you are willing to take on decentralized and centralized platforms. While we were analyzing the whole decentralized lending market it became clear very fast: We needed to find a solution to get stablecoin interest rates for crypto deposits like ETH. And since there were already many possibilities to generate high interest rates if you own stablecoins the mission got even simpler: we needed to find a solution to get stablecoins for crypto deposits. If you zoom out and look at the situation with an objective point of view it is pretty logic where to find the solution: in the banking industry. We also know that the banking industry normally isn't really happy about the upcoming decentralized finance revolution but we managed to find a swiss banking partner which is open for a partnership with the future of finance and is already into crypto.
Because humans make mistakes and code normally doesn't we totally waived out the human aspect in our workflow. Let's have a closer look:
In oversimplified terms we could describe what's happening behind the scenes as followed:
When a user deposits funds into the smart contract via the app.defi.ch website our partner bank and DeFi.ch get notified.
Our partner bank grants us a loan in stablecoins for the US dollar net value of the deposited crypto in our smart contract on the blockchain.
DeFi.ch uses the received stablecoins to generate maximum interest for it's users by using other decentralized financial services in a highly diversified matter.
Once a users withdraws, the smart contract returns the deposited amount inclusive the generated interest automatically. DeFi.ch is notified and returns the stablecoins to the banking partner.
Since the theory sometimes is complicated let's go for a simple real life scenario:
User A deposits 1 ETH on DeFi.ch's decentralized savings platform. Our partner bank and we get notified.
By the time of writing 1 ETH is worth 3600 USD. DeFi.ch receives from the partner bank a loan in form of 3600 USDC. The stablecoins are sent directly and automatically to DeFi.ch.
DeFi.ch starts automatically the process of generating maximum interest by using the stablecoins from the bank. All done without the risk of human error in a highly diversified manner.
User A decides to withdraw after some days. The smart contract returns his deposit plus the generated interest directly into the users wallet, all in one transaction. DeFi.ch gets a notification and the 3600 USDC are returned to the bank.