DeFi Lending and Borrowing
DeFi lending protocols let you earn interest or borrow against your crypto holdings.
How DeFi Lending Works
Supply Side
- Deposit crypto into lending pool
- Earn interest from borrowers
- Interest rates vary by demand
- Can withdraw anytime (usually)
Borrow Side
- Deposit collateral
- Borrow up to a percentage (LTV)
- Pay interest on borrowed amount
- Risk of liquidation if collateral drops
Major Lending Protocols
Aave
- Largest lending protocol
- Multi-chain deployment
- Flash loans
- E-Mode for correlated assets
Compound
- Pioneer of DeFi lending
- Simple interface
- Governance token (COMP)
- Ethereum focused
Morpho
- Peer-to-peer matching
- Better rates for both sides
- Built on top of Aave/Compound
Maker (Sky)
- DAI stablecoin creation
- Over-collateralized positions
- Stability fees
- Real World Asset integration
Key Concepts
Loan-to-Value (LTV)
- Maximum you can borrow vs collateral
- ETH might have 80% LTV
- $10,000 ETH = borrow up to $8,000
- Stay well below max LTV
Liquidation Threshold
- Point where position gets liquidated
- Usually 5-10% above max LTV
- Partial or full liquidation
- Liquidation penalty (5-15%)
Health Factor
- Measure of position safety
- Above 1.0 = safe
- Below 1.0 = liquidatable
- Keep above 1.5 for safety
Strategies
Leveraged Long
- Deposit ETH as collateral
- Borrow stablecoins
- Buy more ETH
- Deposit again (loop)
- Amplifies gains AND losses
Yield Farming
- Deposit stablecoins
- Borrow other stablecoins
- Farm higher yield elsewhere
- Profit = farm yield - borrow rate
Risks
- Smart contract vulnerabilities
- Oracle manipulation attacks
- Liquidation cascade events
- Interest rate spikes
- Protocol governance changes
Best Practices
- Start with blue-chip protocols
- Keep health factor above 1.5
- Set up monitoring alerts
- Understand liquidation mechanics
- Never borrow at maximum LTV