How to DeFi

Lend

DeFi Enjoyer
trading

What

The simple acts of Lending and Borrowing are prominent financial primitives that form the basis of many more complex financial products. Just as there are DEXes operated by Automated Market Makers that allow people to swap their coins seamlessly with each other, there are numerous lending platforms in DeFi.

Why

As a lender, you can provide liquidity (deposit coins to borrow) to the protocol in order to earn interest on your deposits from borrowers, and take out a loan in the form of some other coin using your deposits as collateral

Risk

When borrowing coins against deposited collateral, it is important to keep an eye on our health ratio; if the value of our collateral drops too much in proportion to our loan, the system may forcibly liquidate our funds lest we deposit more or pay back what we have borrowed. While the interest rates on deposits and borrows are decided algorithmically in a transparent manner, they typically are not stable but rather fluctuate depending on supply and demand. In some cases, you may not be able to retreive your deposit in full — if a coin is over-borrowed relative the liquidity deposited on the platform, for example. It is important to read the documentation of the platform we intend to use, as the risks involved can vary greatly depending on the exact implementation.

Reward

Lending protocols in DeFi let people take out loans from each other seamlessly and transparently; the interest rates and risk parameters are decided by the algorithms coded into the decentralised applications — like a bank or a pawn shop, but friendlier. DeFi protocols often reward their users (borrowers and lenders both, in this case) with native tokens, typically used to govern future changes to the protocol.