DeFi lending protocols enable users to supply assets into liquidity pools, where those assets can be borrowed by others.
Lenders earn interest, while borrowers pay interest based on market demand. All activity is governed by transparent, on-chain rules.
If the value of collateral falls below a defined threshold, the protocol triggers liquidation.
Liquidation involves selling a portion of the collateral to repay the loan and maintain system stability.
This process is automated and happens without human intervention.
To borrow assets, users must first deposit collateral. The value of the collateral must exceed the value of the borrowed assets.
This over-collateralization protects lenders and the protocol from default risk.
Interest rates in DeFi are typically variable and adjust automatically based on supply and demand.
When demand to borrow increases, interest rates rise. When liquidity is abundant, rates fall.
Lending and borrowing are used for:
Institutions often use these protocols for capital efficiency.
DeFi lending carries risks such as:
Users must actively monitor collateral positions.
Risk management is critical in decentralized credit markets.
These protocols are suitable for:
They are not suitable for users who cannot monitor positions regularly.
Lending and borrowing protocols provide transparent, automated credit markets in DeFi. When used responsibly, they enable efficient capital use without traditional intermediaries.
This content is for educational purposes only. On-chain trading and DeFi protocols involve financial risk.