What are DeFi lending protocols?
Asked 4 years ago
Hi. What do the protocols on lending platforms do and how o they work? Do protocols mitigate the level of risk involved when adding liquidity to a pool?
Filip Dimkovski
Saturday, September 17, 2022
DeFi lending platforms like Aave, Compound, and Oasis are protocols where you can lend and borrow crypto. For example, if you deposit some ETH at Aave, you'll receive some returns back as interest. Let's say Aave offers 5% APY for ETH lending if you lock your ETH for 1 year. Aave then uses your ETH to lend it to another user, where they will get at least 5% back in interest.
Regarding liquidity pool risks, the protocols are always doing their best to ensure that pool is safe and secure. Unfortunately, a cyber attack or a crash in the asset's price can destabilize the protocol and ultimately the liquidity pool, which is why providing liquidity to a pool can be risky.
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