{"id":150798,"date":"2024-01-15T13:32:35","date_gmt":"2024-01-15T13:32:35","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&#038;p=150798"},"modified":"2024-03-14T11:58:58","modified_gmt":"2024-03-14T11:58:58","slug":"defi-lending","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/defi-lending","title":{"rendered":"DeFi Lending"},"content":{"rendered":"<h2><span id=\"what_is_defi_lending\">What is DeFi Lending?<\/span><\/h2>\n<p><a href=\"https:\/\/www.techopedia.com\/definition\/34630\/decentralized-finance-defi\">Decentralized finance<\/a> (DeFi) lending offers a way to borrow without the common hurdles found with conventional loans. Instead, you can borrow against crypto collateral, giving you instant access to funds.<\/p>\n<p>Business in the DeFi lending category is booming, with an estimated <a href=\"https:\/\/defillama.com\/protocols\/Lending\" target=\"_blank\">$24.62 billion<\/a> in total value locked in <a href=\"https:\/\/www.techopedia.com\/definition\/32499\/smart-contract\">smart contracts<\/a>.<\/p>\n<h3>Techopedia Explains<\/h3>\n<p>DeFi lending refers to using smart contracts, computer programs that run on <a href=\"https:\/\/www.techopedia.com\/definition\/30246\/blockchain\">blockchain<\/a> networks, to borrow against <a href=\"https:\/\/www.techopedia.com\/definition\/27531\/cryptocurrency\">cryptocurrency<\/a> collateral. In addition to borrowing, most platforms also support lending, allowing depositors to earn a yield.<\/p>\n<p><strong>Traditional lending<\/strong> bases loan eligibility on a number of factors, often including credit scores, income, debt-to-income, and collateral. By contrast, DeFi lending typically only considers collateral.<\/p>\n<p>There&#8217;s also no need to ask a bank or lender for a loan. With a few clicks \u2013 and enough crypto collateral \u2013 you can borrow instantly. This makes DeFi lending <a href=\"https:\/\/www.techopedia.com\/definition\/permissionless\">permissionless<\/a>.<\/p>\n<p>Additionally, there&#8217;s no need to explain how you will use the borrowed funds or even provide your name. Your <a href=\"https:\/\/www.techopedia.com\/cryptocurrency\/best-crypto-wallets\">crypto wallet<\/a> address becomes your identity for the purposes of the loan.<\/p>\n<h2><span id=\"how_does_defi_lending_work\">How Does DeFi Lending Work?<\/span><\/h2>\n<p><a href=\"https:\/\/www.techopedia.com\/experts\/how-does-crypto-lending-work\">Crypto loans<\/a> take different forms, including the <a href=\"https:\/\/www.techopedia.com\/cryptocurrency\/best-crypto-lending-platforms\">top centralized lending platforms<\/a> such as Nexo, or decentralized platforms like Aave or Compound Finance.<\/p>\n<p>DeFi lending uses decentralized platforms, meaning there&#8217;s no company or management team making the lending decisions.<\/p>\n<p>Instead, DeFi lending uses smart contracts that work the same for everyone, regardless of income, nationality, or other factors. The DeFi lending protocols themselves are often run by the global community, using crypto tokens to vote on proposals.<\/p>\n<ul>\n<li><strong>Lending protocols like Aave use cryptocurrency collateral to back the loan.<\/strong><\/li>\n<\/ul>\n<p>Let&#8217;s say you have 10 ETH and you don&#8217;t want to sell your ETH to raise money. As an alternative, you can deposit the ETH on Aave or a similar platform and then borrow against the ETH you deposited as collateral. On Aave, you&#8217;ll also earn interest on your deposit. All deposits go into a pool from which borrowers can take loans.<\/p>\n<p>In this example, you&#8217;re not limited to borrowing ETH, however. You can use your ETH as collateral and borrow USDT, for instance, a popular <a href=\"https:\/\/www.techopedia.com\/definition\/stablecoin\">stablecoin<\/a> cryptocurrency that tracks the value of the US dollar.<\/p>\n<ul>\n<li><strong>You&#8217;ll pay interest based on the borrowing demand in the pool versus the supply. <\/strong><\/li>\n<\/ul>\n<p>DeFi lending protocols like Aave don&#8217;t require fixed monthly payments. Repay whenever you&#8217;re ready, but be aware that the loan continues to accrue interest, which adds to your loan value. It&#8217;s also prudent to watch interest rates, which can increase the cost of borrowing if borrowing demand surges.<\/p>\n<p>Loan-to-value (LTV) plays a vital role in DeFi lending. As LTV increases, meaning the value of the loan relative to the collateral value increases, the loan inches closer to liquidation, which is an automatic sale of your collateral.<\/p>\n<h2><span id=\"pros_and_cons_of_defi_lending\">Pros and Cons of DeFi Lending<\/span><\/h2>\n<div class=\"su-table su-table-responsive su-table-alternate\">\n<table width=\"667\">\n<tbody>\n<tr>\n<td width=\"333\"><strong>Pros<\/strong><\/td>\n<td width=\"333\"><strong>Cons<\/strong><\/td>\n<\/tr>\n<tr>\n<td width=\"333\">&#8211; DeFi lending makes loans available to anyone with crypto collateral.<br \/>\n&#8211; Borrowers can borrow without fixed repayment terms.<br \/>\n&#8211; <a href=\"https:\/\/www.techopedia.com\/definition\/interest-rate\">Interest rates<\/a> are often lower compared to personal loans.<br \/>\n&#8211; Borrowed funds can be used for any purpose.<\/td>\n<td width=\"333\">&#8211; Loans must be repaid in the same cryptocurrency borrowed, possibly adding additional trades and costs.<br \/>\n&#8211; <a href=\"https:\/\/www.techopedia.com\/definition\/volatility\">Volatility<\/a> can reduce the value of collateral, possibly causing a liquidation.<br \/>\n&#8211; Smart contracts used by DeFi platforms may be vulnerable to <a href=\"https:\/\/www.techopedia.com\/definition\/26361\/hacking\">hacks<\/a>.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<h2><span id=\"what_are_defi_lending_platforms\">What are DeFi Lending Platforms?<\/span><\/h2>\n<p><a href=\"https:\/\/www.techopedia.com\/cryptocurrency\/best-defi-lending-platforms\">DeFi lending platforms<\/a> offer a user-friendly front end to complex smart contracts that make lending and borrowing possible. As a technical matter, the contracts are also accessible without the front end by using third-party tools or custom <a href=\"https:\/\/www.techopedia.com\/definition\/4356\/software\">software<\/a> if you&#8217;re handy at <a href=\"https:\/\/www.techopedia.com\/definition\/6535\/coding\">coding<\/a>.<\/p>\n<p><strong>Popular platforms include:<\/strong><\/p>\n<ul>\n<li><a href=\"https:\/\/aave.com\/\" target=\"_blank\">Aave<\/a>, which supports 10 blockchains;<\/li>\n<li>JustLend, only available on the <a href=\"https:\/\/www.techopedia.com\/cryptocurrency\/tron-price-prediction\">Tron network<\/a>;<\/li>\n<li>and <a href=\"https:\/\/compound.finance\/\" target=\"_blank\">Compound Finance<\/a>, which supports 4 blockchains.<\/li>\n<\/ul>\n<p>These platforms let you connect a compatible crypto wallet to deposit funds and then borrow was needed. Many look similar, using an easy-to-navigate two-column design highlighting assets supported for deposits and assets available for borrowing.<\/p>\n<h2><span id=\"how_can_i_borrow_with_defi\">How Can I Borrow With DeFi?<\/span><\/h2>\n<p><img decoding=\"async\" class=\"aligncenter size-full wp-image-150934\" src=\"https:\/\/www.techopedia.com\/wp-content\/uploads\/2024\/01\/How-to-Borrow-With-DeFi.jpg\" alt=\"How to Borrow With DeFi?\" width=\"1390\" height=\"895\" srcset=\"https:\/\/www.techopedia.com\/wp-content\/uploads\/2024\/01\/How-to-Borrow-With-DeFi.jpg 1390w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2024\/01\/How-to-Borrow-With-DeFi-300x193.jpg 300w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2024\/01\/How-to-Borrow-With-DeFi-1024x659.jpg 1024w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2024\/01\/How-to-Borrow-With-DeFi-768x495.jpg 768w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2024\/01\/How-to-Borrow-With-DeFi-1200x773.jpg 1200w\" sizes=\"(max-width: 1390px) 100vw, 1390px\" \/><\/p>\n<p>To learn how the borrowing process works, let&#8217;s use a step-by-step example.<\/p>\n<ol>\n<li><strong>Buy a Cryptocurrency Eligible for Collateral<\/strong>:\u00a0If you don&#8217;t already have some crypto, investigate which types of crypto can be used for collateral. Commonly supported options include <a href=\"https:\/\/www.techopedia.com\/definition\/32571\/ethereum-cryptocurrency\">ETH<\/a>, <a href=\"https:\/\/www.techopedia.com\/definition\/tether-usdt\">USDT<\/a>, and <a href=\"https:\/\/www.techopedia.com\/definition\/usd-coin-usdc\">USDC<\/a>. However, many platforms offer a much wider selection of collateral-eligible <a href=\"https:\/\/www.techopedia.com\/experts\/crypto-coins-vs-tokens\">coins or tokens<\/a>. You may want to postpone this step until you choose a platform.<\/li>\n<li><strong>Choose a Platform and Network<\/strong>:\u00a0In this case, let&#8217;s use Aave because the protocol supports 10 networks. Which network you choose may depend on how you want to use the funds. For example, if you need to use your borrowed funds on the <a href=\"https:\/\/techopedia.com\/definition\/arbitrum-arb\" target=\"_blank\">Abitrum network<\/a>, you&#8217;ll likely want to deposit and borrow on Aave using Arbitrum to save on overall costs and avoid cross-chain bridge fees.<\/li>\n<li><strong>Check Availability<\/strong>:\u00a0DeFi lending platforms often use supply and borrowing caps. Be sure the protocol has enough capacity for you to deposit and borrow. Usually, you can tell at a glance.<\/li>\n<li><strong>Make Your Deposit<\/strong>:\u00a0<a href=\"https:\/\/www.techopedia.com\/how-to\/how-to-use-a-crypto-wallet\">Connect your crypto wallet<\/a> to the lending protocol and look for a deposit button. Enter your deposit amount.<\/li>\n<li><strong>Borrow the Funds You Need<\/strong>:\u00a0Tap the borrow button to take a loan. But remember, market price moves and accrued interest can affect your LTV, so borrowing less is often safer. The borrowed funds are sent to your crypto wallet.<\/li>\n<\/ol>\n<h2><span id=\"faqs\">FAQs<\/span><\/h2>\n<div class=\"man_faq_sec\" itemscope itemtype=\"https:\/\/schema.org\/FAQPage\"><\/time><section class=\"ms_faq ms_card \" ><div itemscope itemprop=\"mainEntity\" itemtype=\"https:\/\/schema.org\/Question\"><div class=\"accordionButton\"><h3 itemprop=\"name\">Is DeFi lending risky?<\/h3> <\/div>\n<div class=\"accordionContent\" itemscope itemprop=\"acceptedAnswer\" itemtype=\"https:\/\/schema.org\/Answer\" style=\"display:none;\"><p itemprop=\"text\">DeFi lending comes with two primary risks: liquidation and hacks. Liquidations can occur if the loan-to-value ratio for the loan exceeds a certain threshold, in which case, your collateral can be sold automatically to cover the loan. Hacks represent another risk for DeFi users because the protocol&#8217;s smart contracts themselves become targets, possibly putting user deposits in peril.<\/p>\r\n                <\/div><\/div><\/section>\n<section class=\"ms_faq ms_card \" ><div itemscope itemprop=\"mainEntity\" itemtype=\"https:\/\/schema.org\/Question\"><div class=\"accordionButton\"><h3 itemprop=\"name\">What is DeFi private lending?<\/h3> <\/div>\n<div class=\"accordionContent\" itemscope itemprop=\"acceptedAnswer\" itemtype=\"https:\/\/schema.org\/Answer\" style=\"display:none;\"><p itemprop=\"text\">DeFi private lending refers to lending protocols that mask the wallet addresses of participants, typically using <a href=\"https:\/\/www.techopedia.com\/definition\/zero-knowledge-rollups-zk-rollups\">ZK (zero knowledge) rollups<\/a> to pass completed transactions back to the Ethereum blockchain. Few DeFi lending projects focus on this approach.<\/p>\r\n                <\/div><\/div><\/section>\n<section class=\"ms_faq ms_card \" ><div itemscope itemprop=\"mainEntity\" itemtype=\"https:\/\/schema.org\/Question\"><div class=\"accordionButton\"><h3 itemprop=\"name\">What is the difference between DeFi staking and lending?<\/h3> <\/div>\n<div class=\"accordionContent\" itemscope itemprop=\"acceptedAnswer\" itemtype=\"https:\/\/schema.org\/Answer\" style=\"display:none;\"><p itemprop=\"text\">DeFi staking and lending both involve locking tokens in a smart contract, but the goals often differ. <a href=\"https:\/\/www.techopedia.com\/definition\/staking-blockchain-staking\">Staking<\/a> typically supports security for a blockchain or protocol while earning a yield. By contrast, in DeFi lending, users deposit crypto tokens into a smart contract to earn interest and use them as collateral for loans.<\/p>\r\n                <\/div><\/div><\/section>\n<div class=\"reference-content\">\n<div class=\"reference-heading reference-content-collapsible-heading\">\n<h2><span id=\"references\">References<\/span><\/h2>\n<\/div>\n<div class=\"reference-content-body\">\n<ol>\n<li><a href=\"https:\/\/defillama.com\/protocols\/Lending\" target=\"_blank\" rel=\"noopener\">Lending TVL Rankings<\/a> (DefiLlama)<\/li>\n<li><a href=\"https:\/\/aave.com\/\" target=\"_blank\">Aave &#8211; Open Source Liquidity Protocol<\/a> (Aave)<\/li>\n<li><a href=\"https:\/\/compound.finance\/\" target=\"_blank\">Compound<\/a> (Compound.Finance)<\/li>\n<\/ol>\n<\/div>\n<\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>What is DeFi Lending? Decentralized finance (DeFi) lending offers a way to borrow without the common hurdles found with conventional loans. Instead, you can borrow against crypto collateral, giving you instant access to funds. Business in the DeFi lending category is booming, with an estimated $24.62 billion in total value locked in smart contracts. Techopedia [&hellip;]<\/p>\n","protected":false},"author":286557,"featured_media":150799,"comment_status":"open","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"_lmt_disableupdate":"","_lmt_disable":"","om_disable_all_campaigns":false,"footnotes":""},"definitioncat":[271,272],"class_list":["post-150798","definition","type-definition","status-publish","format-standard","has-post-thumbnail","hentry","definitioncat-blockchain","definitioncat-cryptocurrency"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.2 (Yoast SEO v24.5) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is DeFi Lending? 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