How do liquidity lenders provide DeFi loans?

Asked 2 years ago

Hi guys, I've heard of many people who make money from lending people money and having them pay it back with interest. It never occurred to me that I could do this DeFi as well, until now. How do lending pools work, though? Is it equally distributed among borrowers, or do your assets get 'assigned' a borrower? If the funds are distributed, how do the smart contracts work to return your investment?

Rex Carter

Thursday, August 25, 2022

The crypto holdings in your wallet don’t generate any interest if you don’t put them into use. While the long-term value of the assets may appreciate or depreciate, simply holding a digital currency won’t generate any earnings. This is where liquidity lending is useful. In liquidity lending, you lock your assets in a protocol, which lends them to borrowers. In return, you receive newly minted coins native to the protocol, for example, aTokens for Aave, cTokens for Compound, and Dai for MakerDAO.

Users who borrow from a lending protocol must provide over-collateralized collateral – they deposit more than they borrow. This way, they cover unpredicted expenses and avoid forced liquidation and capital gains tax.

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