In traditional finance, banks act as intermediaries between savers and borrowers — taking your deposits at 0.5% and lending them out at 7%. DeFi lending protocols cut out the bank: depositors and borrowers interact directly through smart contracts, with interest rates set algorithmically by supply and demand.
How Overcollateralized DeFi Lending Works
How Overcollateralized DeFi Lending Works
Unlike traditional credit (which assesses your income and repayment ability), DeFi lending is overcollateralized. You must deposit more value than you borrow — typically 130–150% collateral ratio. If your collateral value falls below the liquidation threshold, smart contracts automatically sell it to repay the loan.
This model eliminates default risk: there is no unsecured lending in DeFi. You can borrow USDC against your ETH, keeping ETH exposure while accessing liquid stablecoins — useful for paying taxes without selling crypto, leveraging positions, or meeting expenses without a traditional bank loan.
Comparing the Top DeFi Lending Protocols
Comparing the Top DeFi Lending Protocols
- ✓Aave v3: most liquid protocol, 15+ collateral types, cross-chain capable
- ✓Compound v3: isolated markets reduce systemic risk, simpler governance
- ✓Variable rates: supply/borrow rates adjust continuously with utilization ratio
- ✓Flash Loans: no-collateral instant loans for arbitrage (repaid in same transaction)
- ✓Health Factor: monitor this metric to avoid liquidation
DeFi Lending FAQs
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