DeFi lending protocols let users deposit assets into smart-contract pools to earn interest, or borrow against crypto collateral without a traditional credit check.
Lending
Deposit stablecoins or major crypto into a protocol (e.g. Aave, Compound). Borrowers draw from the pool and pay variable interest. You receive receipt tokens representing your share, which accrue value as interest flows in.
Interest rates fluctuate with supply and demand. Higher rates during volatile markets often signal elevated borrower desperation — not necessarily a safe opportunity.
Borrowing
Common use case: hold ether long-term, deposit it as collateral, borrow stablecoins for liquidity without selling (avoiding taxes or maintaining exposure).
Loans are overcollateralized — deposit $150 of ETH to borrow ~$100 of USDC. If collateral value falls below the required ratio, the protocol liquidates automatically: sells your collateral, often with a penalty.
Risk summary
| Risk | What it means |
|---|---|
| Smart contract | Code holds funds; audits reduce but don’t eliminate bugs |
| Governance | Protocol parameters can change via token-holder votes |
| Oracle | Price feed failures during crashes can trigger unfair liquidations |
Simulate a 30% price drop on your collateral before borrowing. If liquidation at that level would cause significant loss, reduce position size or avoid borrowing entirely.