Back to: DeFi 101
DeFi lending pools (Aave, Compound, MakerDAO) let anyone earn interest on deposits or borrow against collateral — no credit score, just math. Rates float with supply and demand, visible to everyone.
How it works
1. Lend: deposit assets → receive interest-bearing tokens tracking your share. Withdraw anytime (if liquidity allows). 2. Borrow: lock collateral worth more than the loan (over-collateralized), draw stablecoins or other assets, pay floating interest. 3. Health factor: the ratio keeping you alive. Fall too low → automatic liquidation, no margin call, no mercy.
The numbers that matter
– LTV (loan-to-value): how much you can borrow per collateral dollar. Lower LTV = safer position. – Liquidation threshold & penalty: the tripwire and its fee (often 5–15% on top of your loss). – Utilization/APY: high borrowing demand = high lender yield — and thin exit liquidity.
Three beginner-safe patterns
1. Lend stablecoins on a blue-chip pool for modest, battle-tested yield. 2. Borrow *less than half* of your max against non-volatile collateral. 3. Never borrow to buy more of the same volatile asset (recursive leverage looks brilliant until the cascade).
The red zone
Borrowing volatile assets, max-LTV positions, and “looping” strategies are how portfolios vaporize in a weekend. Cascading liquidations don’t negotiate — and they cluster exactly when everything else is also crashing.
Lending earns; borrowing rents risk. Keep the rented risk small enough that
> a bad weekend is a lesson, not an obituary.
Next lesson: stablecoins deep dive.