Lending Protocol

A lending protocol is a DeFi application that connects lenders and borrowers through smart contracts. Lenders deposit tokens into pools to earn interest, while borrowers lock up collateral to take out loans. No bank, credit check, or identity verification is required.

How DeFi Lending Works:

1. Lenders deposit tokens (e.g., USDC) into a lending pool
2. They receive interest-bearing tokens (e.g., aUSDC) representing their deposit
3. Borrowers deposit collateral (e.g., ETH) worth more than their loan
4. They borrow from the pool, paying variable interest rates
5. Interest rates adjust automatically based on pool utilization

Over-Collateralization: DeFi loans require collateral worth 120-200% of the loan amount. If the collateral value drops below the liquidation threshold, the protocol automatically sells it to repay the loan.

Major Lending Protocols:

Interest Rate Models: Most protocols use utilization-based models. When pool utilization is low, rates are cheap to encourage borrowing. As utilization increases, rates rise sharply to attract more deposits and prevent full depletion.

Risks: - Liquidation: Collateral value dropping below the threshold - Smart Contract Bugs: Protocol vulnerabilities can drain funds - Oracle Failure: Incorrect price feeds triggering false liquidations - Rate Volatility: Borrowing costs can spike during high demand