Definition
DeFi lending protocols (Aave, Compound) create money markets where lenders deposit assets into pools and earn variable interest rates determined by supply/demand. Borrowers post overcollateralized crypto assets to borrow other tokens. Smart contracts automatically handle interest accrual, collateral management, and liquidations. Interest rates adjust dynamically—when demand rises, rates increase to attract more supply.
lightbulb Example
A user deposits $100K in USDC to a lending protocol, earning 5% variable APY. A borrower deposits $150K in ETH (150% collateralization) to borrow $100K USDC at 7% APY. If ETH drops below 120% collateral ratio, the position is automatically liquidated.
verified_user Key Points
- Peer-to-pool lending via smart contracts
- Overcollateralized loans (typically 120-150%+)
- Interest rates adjust dynamically with supply/demand
- Automatic liquidation protects lenders