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DeFi (decentralized finance) offers an innovative alternative to the traditional mortgage system, challenging long-standing yet largely inefficient lending processes in developing countries.
It could be revolutionary in emerging economies with limited access to stable long-term financing. Could fixed-rate lending protocols empower people to take control of their finances?
The lending dilemma in developing countries
Worldwide, major markets move in sync. When interest rates spike in one market, the whole world feels the ripple effect, even among markets of dramatically different sizes.
Every move the United States makes compounds the issue due to the dominance of the US Dollar and the influence of the US Treasury Market, which is the benchmark for global interest rates.
The effect goes both ways. Low and lower-middle-income countries are home to approximately four billion people, so their economic malaise – a state of economic stagnation or downturn characterized by persistent inflation or lackluster growth – will inevitably spill over.
Their economic development is already below average relative to other nations, heightening tensions.
Major lenders are often reluctant to service people living in developing countries because of high perceived risk.
These locations are susceptible to economic instability, which impacts long-term mortgage financing and increases loan defaults.
The lack of a stable local currency, standardized underwriting practice or credit bureaus complicates the conventional approach.
Emerging economies are in a transitional phase of economic development. Relatively high economic growth leads them toward becoming developed nations.
Even under these circumstances, mortgage lending remains poorly understood and inaccessible. DeFi poses a solution – fixed-rate lending protocols.
How DeFi fixes fixed-rate mortgages
Risk-averse centralized institutions with rigid standards dominate traditional lending systems, leaving people in developing countries without access to the funds to purchase a home.
Historically, they have been the only option, even though their processes tend to be outdated, inefficient and exclusionary.
DeFi can potentially democratize homeownership and stimulate the economy by providing an alternative financing solution less susceptible to local market volatility, supporting developing nations and their inhabitants.
Blockchain technology simplifies, secures and streamlines financial transactions, benefiting underbanked and unbanked individuals.
Research shows it directly correlates to improved economic empowerment, financial inclusion, user satisfaction and trust in financial institutions because it enables better access to financial services.
DeFi protocols leverage blockchain technology
Conventional mortgage document verification requires time-consuming cross-validation. The title management process is similarly inefficient and prone to human error and fraud.
Since property transactions and loan servicing involve multiple parties and extensive paperwork, borrowers are often confused about their loan term, interest rate or outstanding balance.
If the lender’s practice is not streamlined, going through conventional channels can take days or weeks.
The time-consuming mortgage underwriting process can take weeks, depending on how busy the lender is and whether the underwriter needs more information.
In comparison, it takes mere minutes to secure a DeFi loan.
DeFi protocols leverage blockchain technology for transparent, accessible and affordable fixed-rate loans, bypassing the inefficiencies and high costs associated with conventional banking.
They store all relevant property, payment and personal details in a tamper-resistant ledger to ensure accuracy and fairness.
Smart contracts facilitate and automate mortgage contracts.
This technology improves verification speed, reduces disputes and eliminates redundancies, enabling institutions to quickly verify documents and offer mortgages.
The process is more transparent, enhancing trust among those in developing nations.
The benefits of DeFi fixed-rate lending protocols
DeFi enables new forms of home ownership and property investment, which are ideal for those in emerging economies.
In peer-to-peer lending, for instance, they could earn a 15 annual percentage yield by lending stablecoins through crypto savings accounts or liquidity pools.
They could use smart contracts to enforce the payback period, reducing counterparty risk.
Asset tokenization enables fractional ownership of loan portfolios, allowing investors to own portions of real estate instead of purchasing it in full.
Communities can collect their funds in liquidity pools to help individuals take out mortgages they wouldn’t have been able to get alone.
Blockchain technology streamlines and lowers the cost of the mortgage process by making most intermediaries redundant.
Traditionally, lenders charge for originating the loan and may also require recipients to pay third-party closing costs for services like appraisals and title insurance.
DeFi has low overhead expenses, making the process more cost-effective.
The future of fixed-rate DeFi lending
Since the blockchain provides an immutable digital ledger, it provides a secure, transparent platform for lenders, borrowers and intermediaries.
Leveraging this technology for fixed-rate lending protocols helps reduce confusion and improve reliability, even in uncertain market conditions.
It could challenge the traditional mortgage process, reshaping the financial future.
Devin Partida is the editor-in-chief of ReHack and is especially interested in writing about fintech. Devin’s work has been featured on Entrepreneur, Forbes and Nasdaq.
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