DeFi Lending and Borrowing Explained: Aave, Compound and More

Earn interest on idle crypto or borrow against your holdings without selling. This guide explains DeFi lending protocols, interest rates, liquidation, and risk management.

DeFi lending protocols let anyone earn interest by supplying assets to a shared pool, or borrow assets by posting collateral. Unlike banks, everything is transparent, permissionless, and governed by smart contracts.

How DeFi Lending Works

When you supply USDC to Aave, you receive aUSDC tokens representing your deposit. Other users borrow from the pool, paying variable interest that flows to suppliers. Rates adjust algorithmically based on utilization — if 90% of the pool is borrowed, rates spike to attract more supply.

Collateral, LTV, and Liquidation

Overcollateralization and Why It Exists

DeFi loans are overcollateralized because there is no credit history or identity. You must post $130–$200 of collateral to borrow $100. While this limits capital efficiency, it ensures the protocol remains solvent. Flash loans are the one exception — borrowed and repaid in a single transaction.

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