What is a decentralized money market and how does it work?

Decentralized money markets operate without a custodian, allowing only the originating user to withdraw funds deposited by lenders and borrowers.

The continuous flow of capital between borrowers and lenders is a key aspect of a vibrant economy. Anyone with an additional asset can loan it out to grow their idle capital, while people who need it to grow their business or meet operational costs can easily access it.

Money markets are the platforms where borrowers and lenders can meet. Throughout history, money markets have been generators of economic activity. Although the structure of money markets has changed over time, their role has remained unchanged.

Traditionally, money markets were centralized structures that facilitated transactions between lenders and borrowers. Borrowers would approach money markets for a short-term (less than a year) loan that could be secured. If borrowers cannot repay their loans, lenders can sell collateral to recover the loaned funds. When the loan is repaid, the collateral is returned.

Borrowers are required to pay interest to lenders (to provide them with working capital) and money market fees (to facilitate the transaction). The interest rate provides adequate liquidity to borrowers as well as lenders. The commission paid to the money market helps them meet their operating expenses.

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