Technical Definition
Lending Protocol
A smart contract system where users deposit assets to earn interest and others borrow against collateral.
By Crypto University Editorial
Collateral · Over-Collateralization · Liquidation · Oracle · APR (Annual Percentage Rate)
✦ Key Insight
It is the main source of on-chain leverage and of relatively straightforward yield, and it is where cascading liquidations begin during sharp market moves.
✕ Common Misconceptions
Borrowing close to the maximum. A modest price move can trigger liquidation and a penalty. Also assuming deposits are always withdrawable — at very high utilisation, withdrawals can be temporarily constrained.
Detailed Explanation
Depositors supply assets to a pool and earn a floating rate. Borrowers post collateral worth more than they borrow and pay interest. Rates move automatically with utilisation, and positions that fall below the required collateral ratio are liquidated by anyone who calls the function.
In Practice
“A borrower posts collateral, draws a stablecoin loan against it, and monitors the health factor as the collateral's price moves toward the liquidation threshold.”