Lending Protocol
A lending protocol is a blockchain-based application that allows users to lend and borrow crypto assets through smart contracts.
✦ Key Insight
Lending protocols are a major part of DeFi. They allow users to: Earn interest on deposited assets Borrow against crypto collateral Access liquidity without immediately selling holdings However, borrowers face liquidation risk and lenders remain exposed to smart-contract, oracle, liquidity, and collateral risks.
✕ Common Misconceptions
Borrowing too close to the liquidation threshold
Ignoring variable interest rates
Assuming collateral cannot fall quickly
Ignoring oracle risk
Treating protocol deposits like insured bank deposits
Ignoring smart-contract risk
Detailed Explanation
How It Works
Users deposit assets into a lending market.
Borrowers provide collateral and borrow other supported assets.
Interest rates may change automatically according to supply and borrowing demand.
If a borrower's collateral value falls below required levels, the position can become eligible for liquidation.
FAQs
Do DeFi loans require credit scores?
Many permissionless protocols rely primarily on on-chain collateral rather than traditional credit scores.
Can lenders lose money?
Yes.
In Practice
Dig Deeper
DeFi
Short for “Decentralized Finance,” it refers to financial applications built on blockchain networks that operate without traditional intermediaries.
Liquidation
Liquidation occurs when a leveraged trading platform forcibly reduces or closes a position because the trader no longer has enough margin to satisfy the required maintenance margin.