DeFi Lending

A bank checks a borrower's income and credit history before it lends, because it extends trust based on the borrower's promise to repay. A DeFi lending protocol has no way to check anyone's income or identity, so it replaces that trust with collateral: a borrower deposits crypto into a smart contract and can borrow up to a set percentage of that collateral's value, always less than 100 percent. To borrow 1,000 dollars in a stablecoin, a borrower might need to lock up 1,500 dollars in ether, a structure known as overcollateralization. The borrower keeps ownership of the collateral and can withdraw it once the loan and any accrued interest are repaid, the same way a car loan releases its lien once the last payment clears.

If the value of the collateral falls and the loan's collateral ratio drops below a threshold the protocol sets, automated liquidators repay part or all of the debt and take the collateral at a discount, without asking the borrower first. This mechanism does the job a bank's collections department would otherwise do. The rule sits in the smart contract's code, so it applies the same way to every borrower on the protocol, whether their position is worth a hundred dollars or a million. A borrower who wants to avoid liquidation keeps a buffer above the minimum required collateral, since crypto prices can move sharply within a single day.

Aave is the largest DeFi lending protocol, with roughly 14.6 billion US dollars in total value locked across more than 15 blockchains, and it accounts for more than a third of all value locked in DeFi lending. Compound, one of the earliest lending protocols, holds several billion dollars more, and newer entrants such as Morpho compete on offering better rates by matching lenders and borrowers more directly. Both Aave and Compound let a lender deposit crypto to earn interest paid by borrowers. Supply and demand for each asset set the interest rate algorithmically: when many people want to borrow a token and few want to lend it, the rate rises automatically until the two sides balance.

DeFi lending has no deposit insurance comparable to Germany's statutory scheme for bank accounts. A smart contract bug or an oracle failure, where the price feed a protocol relies on gives a wrong number, can put a lender's deposited funds at risk even though the borrower's collateral was correctly locked. A protocol such as Chainlink supplies the price feeds many lending platforms use to value collateral and trigger liquidations, so a reliable oracle matters to a lender's safety as much as the smart contract's own code does. A borrower cannot negotiate terms with a person the way they might at a bank; the protocol's code sets the collateral ratio, interest rate and liquidation threshold, and applies them the same way to every user who borrows the same asset.

Finance Loop has a long-term partnership with BTC-ECHO, a Bitcoin and blockchain media platform in the DACH region, on crypto assets, DeFi and Web3, and holds Web3 events in Munich with the network partners W3MUC and DLT Germany. DeFi lending sits in Finance Loop's Investment & Digital Assets track. Related pages: DeFi in Germany, DeFi in Frankfurt and crypto staking.

DeFi lending lets a borrower take a crypto loan directly from a smart contract by locking up collateral worth more than the loan, without a bank or credit check involved. A lender deposits crypto into the same protocol to earn interest paid by borrowers.

A DeFi protocol has no way to verify a borrower's identity or income, so it protects lenders by requiring collateral worth more than the loan. If the collateral's value drops too far, an automated liquidation repays the loan and takes the collateral before the protocol takes a loss.

Aave leads the category with roughly 14.6 billion US dollars in total value locked across more than 15 blockchains, more than a third of the total value locked across all DeFi lending protocols tracked by DefiLlama.