Lending Protocol
A DeFi protocol that enables users to lend crypto assets to earn interest or borrow assets against deposited collateral, all managed by smart contracts without traditional banks. Interest rates are typically set algorithmically based on the utilization rate (ratio of borrowed to supplied assets) within each lending pool.
“Aave and Compound are major lending protocols. You can deposit USDC to earn 3-8% interest, or deposit ETH as collateral to borrow stablecoins for trading or expenses without selling your ETH.”
DeFi (Decentralized Finance)
An ecosystem of financial services built on blockchain networks that operate without traditional intermediaries like banks, brokerages, or insurance companies. DeFi uses smart contracts to provide lending, borrowing, trading, insurance, derivatives, and yield generation in a permissionless, transparent, and composable manner. Anyone with a wallet can participate.
Collateral
Cryptocurrency assets pledged as security for a loan in DeFi protocols. Borrowers deposit collateral that exceeds the loan value (overcollateralization) to protect lenders from default risk. If the collateral's value falls below a certain threshold relative to the loan, it can be automatically liquidated.
Liquidation
The forced closing of a leveraged position or the seizure and sale of collateral when a borrower's position falls below the required margin or collateralization ratio. In DeFi lending, liquidation occurs automatically via smart contracts when the value of collateral drops below a protocol-defined threshold, protecting lenders from bad debt.
Overcollateralization
The practice of depositing collateral worth more than the value of a loan to provide a safety buffer against price volatility. In DeFi, most lending protocols require overcollateralization because there is no credit scoring — the excess collateral protects lenders if the borrower's collateral loses value. Typical ratios range from 110% to 200%+.