Borrowing

What is Borrowing?

Borrowing in DeFi means taking a loan from a decentralized protocol instead of a bank. Most loans are overcollateralized - you must deposit more value than you borrow.

How Borrowing Works

1. Deposit an asset (e.g., ETH) as collateral into a lending protocol.
2. The protocol sets a Loan-to-Value (LTV) ratio defining your borrow limit.
3. Withdraw the desired asset (e.g., USDC) directly from the protocol.
4. Interest accumulates on the borrowed amount over time.
5. If collateral value drops below the liquidation threshold, the protocol sells it to repay the loan.

Why Borrowing Matters

It lets users access liquidity without selling long-term holdings - useful for trading, tax management, leverage, or hedging, all without a credit check.

Key Features

• No credit checks or approvals
• Instant, 24/7 availability
• Overcollateralized
• Liquidation risk if prices drop
• Interest rates set by supply and demand

Examples

• Depositing ETH on Aave to borrow USDT for a short-term purchase.
• Using a Flash Loan to borrow millions for seconds to perform arbitrage.
• Borrowing DAI against WBTC on MakerDAO to generate a decentralized stablecoin.