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DeFi Education7 min read

DeFi Lending and Borrowing: A Complete Guide

How lending protocols like Aave and Compound work, strategies for borrowers, and how to manage liquidation risk.

How DeFi Lending Works

DeFi lending protocols create permissionless money markets. Suppliers deposit assets to earn interest, and borrowers post collateral to take loans. No credit checks, no paperwork — just smart contracts.

Key Protocols

  • Aave: Largest multi-chain lending protocol with flash loans and variable/stable rates
  • Compound: Pioneer of algorithmic interest rates on Ethereum
  • Morpho: Peer-to-peer lending layer that optimizes rates
  • Spark: Maker-backed lending with DAI synergy

Supplying Assets

When you supply tokens (e.g., USDC), you receive interest-bearing tokens (aUSDC, cUSDC). These accrue interest automatically. Current supply rates range from 2-10% depending on demand.

Borrowing Assets

  • Deposit collateral (e.g., ETH)
  • Borrow up to the loan-to-value (LTV) ratio (e.g., 80% for ETH)
  • Pay variable interest on borrowed amount
  • Repay the loan and withdraw collateral anytime

    • Liquidation Risk

    If your collateral value drops below the liquidation threshold, anyone can repay part of your debt and claim your collateral at a discount. Monitor your health factor:

    • Health Factor > 2: Safe
    • Health Factor 1.5-2: Monitor closely
    • Health Factor < 1.5: Consider repaying or adding collateral
    • Health Factor = 1: Liquidation occurs

    Strategies

    • Leveraged yield: Deposit stETH, borrow ETH, buy more stETH (amplified staking yield)
    • Stable borrowing: Deposit volatile assets, borrow stables for expenses
    • Rate arbitrage: Borrow where cheap, supply where rates are higher

    Using Alkizen with Lending

    Swap tokens on any chain to the assets you want to supply, directly in one transaction. No need to manually bridge to the right chain first.

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