What is Lending (DeFi)?

DeFi lending protocols let users deposit cryptocurrency to earn interest while borrowers take loans against collateral. Smart contracts replace banks automatically managing collateral, interest rates, and liquidations.

How does Lending (DeFi) work?

Lender deposits 100 ETH and receives interest-bearing tokens (e.g., aETH on Aave).
Borrower deposits $200,000 in ETH as collateral to borrow $150,000 USDC.
Interest rates adjust algorithmically based on utilization.
If collateral falls below the minimum ratio, liquidators repay the loan and claim discounted collateral.

Why does Lending (DeFi) matter?

DeFi lending removes intermediaries from a trillion-dollar industry. Anyone with a wallet can earn yield as a lender or access credit as a borrower.

Key features of Lending (DeFi)

Overcollateralized: borrowers deposit more than they borrow
Algorithmic interest rates based on supply and demand
Automatic liquidation protects lenders from defaults
Non-custodial: you keep control of your private keys

Examples of Lending (DeFi)

Aave lets users earn 3-4% APY on ETH deposits while borrowers pay 5-8% APY on USDC loans. Compound pioneered algorithmic rates that adjust in real time.

Flash loans let borrowers take millions instantly with no collateral, as long as the loan is repaid within the same transaction.