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What is a self-paying loan?

While credit has long played an important role in traditional finance, the field of decentralized finance has only recently opened up the possibility of borrowing to its users. The main advantage of DeFi lending is the permission-free and transparent environment in which individuals can engage in obtaining funds without relying on intermediaries.

In this context, self-paying loans represent a revolutionary innovation. It is a concept that challenges the traditional notion of loan, allowing borrowed funds to generate income that covers interest payments and even potentially exceeds them.

In this article, we explore the intricacies of a self-paying loan at DeFi and its underlying mechanisms.

What is loan in DeFi

In the decentralized finance ecosystem, loan plays a key role in reshaping traditional financial systems. It allows people to access funds as well as participate in a range of financial services without relying on banks.

DeFi loan serves as a mechanism for individuals to obtain liquidity and use assets outside of their immediate possession. It provides opportunities for both borrowers and lenders, creating a decentralized marketplace for financial transactions. The main goal of lending in DeFi is to ensure efficient and affordable allocation of capital, promoting financial inclusion.

Various forms of lending are available in the DeFi ecosystem, each serving a specific purpose. These include:

Secured loans. These loans require borrowers to provide collateral that exceeds the value of the loan. Secured loans give borrowers the advantage of access to larger loan amounts, often at better interest rates.
Unsecured loans. Don't require collateral. Often have smaller loan limits and higher interest rates than secured loans.
Flash loans. Allow borrowers to access funds without prior collateral. These loans are made in a single transaction and require borrowers to repay the loan in the same transaction.
P2P loans. Allow individuals to lend and borrow directly from each other, eliminating the need for intermediaries.

This is just a brief overview of the various forms of lending available in the DeFi ecosystem.

Self paying loan

In the evolving DeFi landscape, a self-paying loan is an innovative approach that allows users to repay the interest on the loan quickly. A lender can provide a customer with a loan in exchange for collateral in the form of a small deposit. This deposit is then inverted by the lender, who continues to earn interest. Once the lender has earned the full value of the original loan, he returns the deposit, and the loan recipient does not ultimately have to repay the loan.

The concept of a self-paying loan is a new financial instrument that combines the functions of a loan and a savings account. It allows you to earn interest on your deposited funds and at the same time use them as collateral for a loan.

With this innovative approach, the interest accrued on your deposits automatically goes towards repaying the loan amount. This ensures that the outstanding balance never increases, maintaining a stable financial position. What's more, because you're borrowing against the same assets that serve as collateral, there is no risk of liquidation, ensuring that your assets remain intact throughout the entire lending process.

The mechanics of this approach are that lenders use the collateral provided by borrowers to make a profit. By strategically investing the deposit, lenders can earn interest and gradually accumulate an amount equivalent to the value of the loan. This self-paying loan mechanism creates a unique dynamic in the DeFi 2.0 ecosystem (DeFi 2.0 is the second generation of decentralized finance, with projects that address the problems of the «first version» and include more efficient use of capital, liquidity stabilization mechanisms, and long-term incentives for users).

One of the advantages of this concept is its potential to provide borrowers with an alternative to repaying a loan. Instead of bearing the burden of repaying principal and interest, borrowers benefit from the lender's ability to generate a return on the collateral deposit. Not only does this benefit borrowers, but it also introduces an alternative approach to loan repayment within DeFi.

However, it is important to note that this approach also comes with certain risks. The success of this self-paying loan maneuver depends on the lender's ability to effectively invest the collateral deposit and generate sufficient returns. Market volatility and unpredictable investment outcomes can affect the profitability of this approach.

The use of self-paying loans

One example of a DeFi platform that offers self-paying loans is the DSF. With DSF, borrowers can take out loans and repay them with their own deposits. This approach gives users a number of advantages, including the ability to access capital without worrying about paying it back. It also allows borrowers to earn interest on their deposits, which are used as collateral.

For lenders, using self-paying loans can be a way to earn interest while reducing risk. Because borrowers are required to provide collateral, lenders are protected if the borrower defaults on the loan. And because the loan is designed to be self-paying, lenders don't have to worry about the recipient being unable to repay.

The benefits of a self-paying loan extend not only to borrowers, but also to lenders and the DeF ecosystem as a whole. Here are some key aspects of the concept:

Increased affordability. Loans that pay for themselves offer borrowers a more affordable option for borrowing. Profits from invested collateral are used to cover interest payments, reducing the immediate financial burden on users.
Increased financial flexibility. By eliminating the need for immediate loan repayment, borrowers can redirect their resources to other investment opportunities or financial goals.
Reduced risk of default. The self-payment lending model serves as a safeguard against default for lenders. Because income from invested collateral covers interest, the risk of default is reduced, increasing the overall stability of the lending ecosystem.
Market liquidity. The availability of loans that pay for themselves attracts more participants to the DeFi ecosystem, contributing to greater liquidity and market activity.

As the DeFi ecosystem continues to evolve, the use of payday loans holds tremendous promise. Not only does it provide borrowers with affordable lending options and financial flexibility, but it also encourages lenders to become more involved in the lending market. Together, these factors contribute to more inclusive, efficient, and sustainable financial development in decentralized finance.