How does DeFi lending work?

DeFi lending protocols match lenders and borrowers through smart contracts. Lenders deposit assets into pools and earn interest. Borrowers provide collateral (worth more than their loan) and pay interest. No banks, no credit checks — all governed by code.

What is liquidation in DeFi?

Liquidation occurs when your collateral value drops below the required ratio. The protocol automatically sells part of your collateral to repay the loan, plus a liquidation penalty (typically 5-10%). Monitor your health factor to avoid liquidation.

Aave is one of the most battle-tested DeFi protocols with $10B+ in TVL and multiple security audits. However, smart contract risk is never zero. The protocol has safety modules and insurance mechanisms, but users should never deposit more than they can afford to lose.

What is a flash loan?

A flash loan is an uncollateralized loan that must be borrowed and repaid within a single transaction. If the borrower can't repay, the entire transaction reverts as if it never happened. Used for arbitrage, liquidations, and collateral swaps.

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DeFi

5 min

DeFi Lending & Borrowing 101: Aave, Compound & Beyond

How decentralized lending works, comparing Aave V3 vs Compound V3, understanding liquidation risk, and practical strategies for earning yield or leveraging positions.