DeFi lending & borrowing

Beyond swapping, one of DeFi's biggest uses is lending and borrowing — earning interest on idle assets, or borrowing against what you hold without selling it. Protocols like Aave and Compound pioneered it, and the mechanics are worth understanding even if you only ever lend.

Lending: earning interest

You deposit an asset into a lending pool, and borrowers pay interest to use it. Your deposit earns a variable rate set by supply and demand — more borrowing demand, higher yield. It's a relatively straightforward way to earn on assets you'd otherwise just hold, though smart-contract risk still applies.

Borrowing: the over-collateralized model

Here's the part that surprises newcomers: to borrow, you must deposit more value than you take out. This over-collateralization exists because the protocol can't run a credit check — your collateral is the only guarantee.

• Deposit $1,500 of ETH, borrow perhaps up to $1,000 of stablecoins against it.
• Why borrow against your own crypto? To get liquidity without selling (and without triggering a taxable sale), or to leverage a position.

Liquidation: the risk to respect

If your collateral's value falls too far — so the loan gets too close to the value backing it — the protocol liquidates you: it sells your collateral to repay the loan, usually with a penalty. A falling market can trigger this fast.

• Keep a healthy buffer between what you borrow and your collateral's value.
• Volatile collateral is riskier; a sharp drop can liquidate you before you react.
• Watch your health factor (or equivalent) — the metric showing how close you are to liquidation.

Why this matters even for swappers

Lending rates underpin much of DeFi's yield, and the same collateral-and-liquidation logic powers leveraged trading — which is exactly where the next module goes. Start by lending a stablecoin to see the mechanics with minimal risk before ever borrowing.