Lending protocol

A lending protocol is a decentralized finance application that runs on a public blockchain. It lets people supply a crypto asset to earn interest and lets others borrow an asset by posting collateral. Instead of a bank or a broker matching the two sides, smart contracts handle deposits, loans, and interest automatically.

Interest rates are set by supply and demand within each market. When borrowing demand rises relative to the supplied amount, rates tend to rise, and when demand falls, rates tend to fall. The interest that borrowers pay funds the interest that lenders earn.

Borrowers usually post collateral worth more than the amount they take out. If the value of that collateral drops below a required level, the protocol can liquidate it to repay lenders. Like any on-chain system, a lending protocol carries risk, including smart-contract risk, liquidation risk, and the market risk that comes with variable rates.