Lending: lending and borrowing

In DeFi you can lend your tokens and earn interest, or leave your tokens as collateral and borrow against them. A smart contract handles everything, with no bank involved.

Well-known platforms: Aave, Compound, Kamino (Solana).

Lending: the simple part

You deposit USDC into the contract and earn interest while someone else borrows it.

1. You deposit 1,000 USDC
2. The contract lends it out to others
3. You earn interest, it accrues on its own
   and you can withdraw whenever you want, almost always

Nobody sets the interest rate: it comes from the pool's supply and demand. When a lot of people want to borrow, it goes up.

Borrowing: where the risk is

Here's what you need to understand well.

1. You deposit $1,500 in ETH
   your collateral
2. You receive $1,000 USDC
   the loan
3. You pay interest for as long as the debt exists

Notice the asymmetry: you leave $1,500 to receive $1,000. That's called overcollateralization, and it exists because the contract doesn't know who you are and can't come after you. Your collateral is all it has.

The liquidation

If your collateral drops in value, you get sold out

The contract watches the ratio between your debt and your collateral. If ETH falls enough, it automatically sells your ETH to cover the debt, plus a penalty on top.

There's no warning, no call, no grace period. It happens in the same block.

   ETH at $3,000   →  collateral $1,500  debt $1,000  ✅ ok
   ETH at $2,400   →  collateral $1,200  debt $1,000  ⚠️ at the limit
   ETH at $2,000   →  collateral $1,000  debt $1,000  ❌ liquidated

That's why experienced people borrow much less than they could: if the max is $1,000, borrowing $400 gives you room to survive a drop.

What would I borrow for?

The most common legitimate uses:

• Not selling. You need liquidity but don't want to give up your ETH (out of conviction, or because of taxes).
• One-off expenses without exiting your position.

And the use that sinks people:

Borrowing to buy more

You deposit ETH, borrow USDC, buy more ETH, deposit that too. That's leverage under another name, and a 30% drop liquidates the whole chain at once.

The risks, ranked

Risk	What it is
Liquidation	The main one. Your collateral drops and you get sold out
Smart contract	A bug or a hack in the protocol. Has happened many times
Interest changes	It's variable; it can rise while you hold the debt
The oracle	The contract reads the price from an external service. If it's manipulated, you get liquidated wrongly

Practical rules

1. Start by lending, not borrowing. Lending has contract risk; borrowing has contract risk and liquidation risk.
2. Use large, old protocols. In lending, boring and audited for years beats a high APY.
3. Borrow half of what they let you. The protocol's limit is not a recommendation.
4. An APY that looks too good is a temporary subsidy or a trap. See Vaults.

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