DeFi Lending & Borrowing
Earn interest by lending your crypto, or borrow against your holdings without selling. DeFi makes banking permissionless.
How DeFi Lending Works
DeFi lending connects lenders and borrowers directly through smart contracts. No banks needed.
The Flow:
- Lenders deposit crypto into a lending pool
- They earn interest from borrowers
- Borrowers deposit collateral (more than they borrow)
- They pay interest to lenders
- Smart contracts enforce the rules automatically
Popular Lending Protocols:
| Protocol | Networks | TVL |
|---|---|---|
| Aave | Ethereum, Polygon, etc. | $10B+ |
| Compound | Ethereum | $2B+ |
| MakerDAO | Ethereum | $5B+ |
In DeFi, you must deposit MORE collateral than you borrow. This protects lenders if you can't repay. Typical ratio: 150% collateral for 100% loan.
Lending: Earn Interest
How to Lend on Aave:
- Go to app.aave.com
- Connect your wallet
- Choose asset to supply (ETH, USDC, etc.)
- Enter amount
- Approve and supply
- Start earning interest!
Typical Lending APY:
- Stablecoins (USDC, DAI): 2-8% APY
- ETH: 1-3% APY
- Volatile assets: Variable
Most DeFi rates are variable - they change based on supply and demand. High demand to borrow = higher rates for lenders. Low demand = lower rates.
Lending Benefits:
- Passive income on idle crypto
- No lockup - withdraw anytime
- Higher rates than traditional savings
- Full control of your assets
Borrowing: Loans Without Selling
Why Borrow Instead of Sell?
- Keep exposure to your assets (if price goes up)
- Avoid taxable sale events
- Access liquidity without losing position
- Leverage (advanced, risky)
How to Borrow on Aave:
- First, supply collateral (ETH, BTC, etc.)
- Click "Borrow"
- Choose asset to borrow
- Check your "Health Factor"
- Enter amount (stay safe!)
- Confirm transaction
Health Factor shows how safe your position is:
- Above 1.5 = Relatively safe
- 1.0-1.5 = Getting risky
- Below 1.0 = LIQUIDATION
If collateral value drops too much, you get liquidated!
Common Use Cases:
- Borrow stablecoins against ETH to pay bills
- Take USD loan without selling BTC
- Leverage trading (advanced, high risk)
Risks to Understand
Liquidation Risk
If your collateral value drops, your position can be liquidated. You lose your collateral plus a penalty fee.
Smart Contract Risk
Bugs in code can lead to loss of funds. Use established, audited protocols.
Interest Rate Risk
Rates can spike during high demand. Your borrowing cost could increase suddenly.
How to Stay Safe:
- Keep Health Factor above 2.0 (conservative)
- Monitor your position regularly
- Have extra collateral ready to add
- Use stablecoins as collateral for lower risk
- Start small to learn
You deposit 1 ETH ($2000) as collateral
You borrow $1000 USDC
ETH drops to $1200
Your collateral ratio drops below threshold
Protocol liquidates your ETH to repay loan
You lose your ETH + pay liquidation penalty
Always maintain a safe buffer!