It sounds like a bet you cannot lose. You lend money to a borrower who provides collateral of higher value than the loan, and then you earn interest of about 20 percent. What could possibly go wrong?
That is the idea behind “DeFi,” or decentralized finance. These are cryptocurrency platforms that let one person, a lender, deal directly with another, a borrower, without involving banks.
DeFi has grown a lot during the COVID-19 health crisis.
Loans on such platforms have risen more than 600 percent since March to $3.7 billion, says DeFi Pulse, an industry website. It says investors are seeking higher returns since central banks have cut interest rates to support economies hurt by the COVID-19 coronavirus.
The DeFi platforms operate on free code services. They use information systems that process interest rates in real-time based on supply and demand. Some industry experts say the ease and effectiveness of these platforms are the future of borrowing and lending.
But others warn that DeFi operations carry high risks.
Lawyers and observers say the websites can have weak security that leaves them open to computer system problems and attacks. They also say most platforms are untested and operate without any governmental supervision. As a result, they offer few if any legal protections to users.
In 2017, investors put billions of dollars into ICOs, or initial coin offerings, a way to buy cryptocurrency. Many crypto companies raised money by making new “virtual” coins. But most of the companies failed to get