Lending protocol (money market)

A lending protocol is a set of smart contracts that pools deposits from many users and lends them out to borrowers. Suppliers receive a receipt token that grows in value as interest accrues, while borrowers must first lock collateral worth more than the loan. Interest rates are not negotiated: an algorithm adjusts them according to how much of each pool is already borrowed.

Aave, Compound, Spark and Morpho are among the best-known money markets, and together they hold a large share of all value locked in DeFi. Traders use them to take leverage, funds use them to borrow stablecoins without selling their crypto, and holders of idle assets use them to earn a variable yield.

The main risks are smart contract bugs, faulty price oracles and liquidation cascades when collateral prices fall quickly. Depositors can also find themselves unable to withdraw if almost everything in a pool has been lent out, and governance decisions on listed assets or parameters can change the risk profile overnight.