What is a DeFi lending protocol?
A DeFi lending protocol enables peer-to-contract lending and borrowing. Lenders deposit assets and earn interest. Borrowers provide collateral (usually more than they borrow) and pay interest. The smart contract manages everything automatically.
How lending protocols work
- Lenders deposit assets (e.g. USDT) and receive interest-bearing tokens (e.g. aUSDT on Aave)
- Borrowers deposit collateral (e.g. ETH) and borrow against it (e.g. 75% of collateral value)
- If collateral value drops below the liquidation threshold, the protocol automatically liquidates it to repay the loan
- Interest rates adjust algorithmically based on utilisation rate
Major lending protocols
| Protocol | Chain | Notable feature |
|---|---|---|
| Aave | Multi-chain | Flash loans, variable/stable rates |
| Venus | BSC | BSC-native, high utilisation |
| Compound | Ethereum | Original lending protocol |
| Radiant | Multi-chain | Cross-chain lending |
Lending vs liquidity provision
Lending protocols typically offer lower yields than liquidity provision but with lower risk (no impermanent loss). The tradeoff is between yield and risk.