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

1. Deposit ETH as collateral
2. Borrow stablecoins
3. Buy more ETH
4. Deposit again (loop)
5. Amplifies gains AND losses

Yield Farming

1. Deposit stablecoins
2. Borrow other stablecoins
3. Farm higher yield elsewhere
4. Profit = farm yield - borrow rate

Risks

1. Smart contract vulnerabilities
2. Oracle manipulation attacks
3. Liquidation cascade events
4. Interest rate spikes
5. Protocol governance changes

Best Practices

1. Start with blue-chip protocols
2. Keep health factor above 1.5
3. Set up monitoring alerts
4. Understand liquidation mechanics
5. Never borrow at maximum LTV