Borrowing & Lending

DeFi borrowing and lending allow users to access liquidity, earn passive income, and participate in leveraged strategies using blockchain-based protocols. These platforms enable permissionless, transparent financial services, where lending and borrowing occur directly between users through smart contracts.

🔄 How DeFi Lending Works

1. Lenders deposit assets into liquidity pools (e.g., ETH, USDC, DAI) and earn interest from borrowers.
2. Borrowers take loans by depositing collateral (e.g., ETH for borrowing USDC) to secure the loan.
3. Interest rates are determined algorithmically based on supply and demand.
4. If collateral value drops below a required threshold, it may be liquidated to protect lenders.

⚙️ Key Features

✅ Overcollateralized Loans – Most DeFi loans require collateral worth more than the borrowed amount (e.g., borrowing 50% of collateral value). ✅ Algorithmic Interest Rates – Rates fluctuate based on asset demand and liquidity availability. ✅ No Credit Scores – Loans are secured by collateral, eliminating the need for credit checks. ✅ Liquidation Mechanisms – If collateral falls below a threshold, smart contracts automatically liquidate assets to repay the loan.

🏛 Example 1: Lending on Aave

A user deposits USDC into Aave, earning 6% APY as borrowers pay interest. The protocol ensures capital security through overcollateralization and liquidation rules.

🏛 Example 2: Borrowing on Compound

A trader deposits ETH as collateral on Compound to borrow DAI, allowing them to trade or farm yield while keeping their ETH holdings. If ETH’s price drops too much, the loan gets liquidated to protect lenders.

📚 References

1. Aave Docs – How DeFi Lending Works
2. Compound Docs – Understanding Borrowing & Lending

⚠️ Controversies & Misconceptions

• “DeFi loans are risk-free” – False. Smart contract vulnerabilities, liquidation risks, and interest rate fluctuations can affect profitability.
• “Borrowers can take unlimited loans” – False. Borrowing limits depend on collateral value and protocol loan-to-value (LTV) ratios.

🚀 Conclusion DeFi borrowing and lending platforms provide an alternative to traditional banking, enabling users to earn passive income or access liquidity. However, users must understand liquidation risks, interest rate fluctuations, and smart contract security before participating.