How do DeFi lending protocols work?

DeFi lending protocols enable users to lend and borrow cryptocurrencies in a permissionless, immutable, interoperable, and transparent way. A traditional approach is where a financial institution gives loans to borrowers. But in DeFi lending, the protocols facilitate Peer-to-Peer (P2P) lending between users and eliminates the need for intermediaries.

These protocols allow lenders to earn interest for lending their assets and long-term crypto investors to generate high-interest rates. This is how DeFi lending protocols work when it comes to asset management:

• Borrowers initiate the process by locking assets as collateral
• The platform distributes loans via self-governing smart contracts
• The borrowers are charged an interest rate for borrowing assets
• The interest generated is distributed to the lenders, and the platform