Loans on platforms have risen more than seven-fold since March to $3.7 billion, according to industry site DeFi Pulse, as investors hunt returns at a time when central banks across the world have slashed interest rates to prop up economies battered by the pandemic. Proponents say DeFi sites, which run on open-source code with algorithms that set rates in real-time based on supply and demand, represent the future of financial services, providing a cheaper, more efficient and accessible way for people and companies to access and offer credit.
Critics warn the technology could be the next overblown bubble of the crypto world, akin to initial coin offerings (ICOs), with inexperienced investors at particular risk. In 2017, billions of dollars poured into ICOs, where companies raised capital by issuing new virtual coins. Most projects failed to gain traction, and many investors lost their money.
DeFi is not for the faint-hearted. Borrowers are typically traders who take out loans in say, ethereum, then use the coins to trade on various exchanges against other cryptocurrencies. They then aim to pay back the loan and pocket their profits, comparable to short-sellers in stock markets.