Lending Protocol
A DeFi application that lets users supply assets to earn interest and borrow against collateral without a bank.
DeFi lending protocols (Aave, Compound, Morpho) let users deposit tokens to earn interest and borrow other tokens by locking up overcollateralised assets. Deposits are pooled; interest rates adjust algorithmically based on utilisation — the proportion of deposited funds that have been borrowed.
All loans are overcollateralised: a borrower must lock up more value than they borrow. If the collateral value falls below a threshold (the liquidation threshold), automated liquidators can repay the loan and claim the collateral at a discount, protecting depositors from bad debt.
Undercollateralised lending (without enough locked collateral) exists in DeFi only within a single atomic transaction — via flash loans — which must be borrowed and repaid in the same block or the entire transaction reverts.