Crypto lending

Crypto lending connects people who want to earn interest on idle coins with people who want to borrow. Borrowers usually lock up more value in crypto than they take out, so the lender is protected if the borrower never repays. Interest rates float with supply and demand for each asset.

There are two main models. Centralized lenders take custody of deposits and lend them out on their own terms, much like a bank without deposit insurance. DeFi protocols such as Aave and Compound run the same logic in smart contracts: anyone can supply assets to a pool or borrow from it, and positions that fall below the required collateral level are liquidated automatically.

The risks differ by model. Several centralized lenders froze withdrawals and went bankrupt in 2022, leaving depositors as unsecured creditors. On-chain lending avoids that custody risk but adds smart contract bugs, oracle failures and sudden liquidations when prices fall fast.