What is DeFi Lending?
DeFi lending protocols allow you to supply crypto assets to earn interest from borrowers, or borrow against your crypto holdings without selling. Unlike traditional banks, rates are determined algorithmically based on supply and demand, and everything operates 24/7 through smart contracts.
How DeFi Lending Works
For Lenders (Suppliers)- Deposit assets into a lending pool
- Receive interest-bearing tokens (aTokens, cTokens)
- Earn yield from borrower interest payments
- Withdraw anytime (subject to liquidity)
- Deposit collateral (typically 150%+ of loan value)
- Borrow against collateral
- Pay variable interest rate
- Risk liquidation if collateral value drops
Top Lending Protocols
Aave- Largest lending protocol by TVL
- Multi-chain (Ethereum, Arbitrum, Optimism, etc.)
- Flash loans, efficiency mode, isolation mode
- 2-8% APY on major assets
- Pioneer of DeFi lending
- Simple, battle-tested
- COMP governance token rewards
- 2-6% APY on major assets
- Peer-to-peer optimization layer
- Better rates for both lenders and borrowers
- Works on top of Aave/Compound
- 3-10% APY improvements
- MakerDAO's lending arm
- DAI-focused ecosystem
- Competitive ETH/stablecoin rates
Understanding Lending Rates
Supply APY: What you earn for depositing assets- Higher utilization = higher rates
- Typically 2-10% for major assets
- Can spike during high demand
- Always higher than supply rate
- Variable based on utilization
- Understand your ongoing costs
Key Concepts
Collateral Factor: How much you can borrow against deposited assets (e.g., 80% means $80 borrowing power per $100 deposited) Health Factor: Ratio of collateral value to borrowed value. Below 1.0 = liquidation risk. Liquidation: If your health factor drops too low, your collateral is sold to repay the loan.Lending Strategies
Simple Supply: Deposit stablecoins for consistent yield Recursive Lending: Supply → Borrow → Supply again for leveraged yield Collateral Optimization: Use highest-factor assets as collateralRisk Management
- Monitor health factor (stay above 1.5-2.0)
- Avoid volatile collateral during market stress
- Understand liquidation penalties
- Diversify across protocols