According to Ryan Sean Adams, a famous crypto investor, DeFi protocols are forcing CeFi platforms to pay back their loans. Ryan Sean has once again defended decentralized finance, promoting it as superior to traditional finance models.
DeFi platforms run on smart contracts. Smart contracts are lines of code that execute themselves without the intervention of individuals or institutions. The purpose of inventing smart contracts was to do away with intermediaries in the financial sector and other sectors.
Ryan Sean has now emphatically stated that the financial system does not require laws, attorneys, or courts.
How DeFi Loans Work
Sean’s point of view was amplified by CeFi platforms struggling to pay up their loans to avoid liquidation. Just like in traditional finance, borrowers need collateral to obtain loans. The collateral used on DeFi protocols could be stablecoins or volatile coins. More recently, some DeFi protocols have started accepting non-fungible tokens as collateral.
The loan has a timeline that should be repaid. If the borrower fails to repay when due, the collateral is seized. More so, for volatile collaterals, the collateral can be liquidated if market conditions turn extremely favorable.
To avoid unwarranted losses and risks for lenders, lending platforms over-collateralize their loans. This helps to protect lenders. This collateralization ratio usually ranges between 1:1.5 and 1:2.
The structure of DeFi lending platforms makes it only logical for borrowers to obtain loans when they bet on the rise in the prices of assets. However, in recent times, CeFi protocols have been trapped.
The crypto market has been bloody for the bulls. This put many big names in the industry in a tight situation. To avoid the liquidation of their collaterals, which are typically much more valuable than their loans, CeFi platforms have been forced to pay their loans promptly.
DeFi fans like Ryan Sean believe the lending structure is sustainable, and in the future, DeFi will completely replace CeFi.