DeFi Lending

DeFi lending protocols like Aave, Compound, and MakerDAO replace traditional banks with smart contracts. Lenders deposit crypto into liquidity pools and earn interest. Borrowers post collateral (typically 120-150% of the loan value) and pay interest to borrow from those pools. No credit checks, no applications, no intermediaries.

Interest rates are algorithmic — they adjust based on supply and demand for each asset in the protocol. When lending demand for stablecoins is high, yields increase to attract more lenders. When borrowing demand drops, rates decrease. This creates a dynamic, transparent interest rate market.

Over-collateralization is the key safety mechanism. To borrow $1,000, you might need to deposit $1,500 in crypto collateral. If the collateral value drops below a threshold (the liquidation ratio), the protocol automatically liquidates the collateral to repay lenders. This ensures lenders are protected even without credit assessments.

Common use cases include: earning yield on idle crypto (lending), leveraged trading (borrow stablecoins against crypto to buy more), accessing liquidity without selling (borrow against appreciated crypto to avoid triggering capital gains), and arbitrage between lending rates across protocols.

The risks are substantial: smart contract bugs can lead to fund loss, oracle manipulation can trigger false liquidations, protocol governance changes can affect rates and parameters, and during extreme market crashes, the liquidation cascade can cause significant losses. Only lend and borrow on well-audited protocols with strong track records.