Lending vs. borrowing in DeFi
Two roles, one pool, no bank in between. Suppliers earn yield; borrowers post more than they take. The collateral is the only guarantee.
DeFi lending protocols work as liquidity pools governed by smart contracts, with no bank as intermediary. Two roles interact.
Lenders (suppliers)
Lenders deposit assets into a pool to earn yield. In return they typically receive interest-bearing tokens — such as aTokens or cTokens — that represent their deposit plus accrued interest, redeemable at any time as long as there's available liquidity. It's a relatively passive way to earn on otherwise idle assets.
Borrowers
Borrowers take assets from the pool but must post collateral worth more than what they borrow — this is over-collateralization, the cornerstone of DeFi lending. To borrow $70, you might need to lock $100 in collateral, because there's no credit check or legal recourse: the collateral is the only guarantee. Borrowers pay interest, and that interest is what funds the lenders' yield.
How rates are set
Interest rates are usually algorithmic, driven by pool utilization — how much of the supplied liquidity is currently borrowed. When utilization is high, rates rise to attract more suppliers and discourage new borrowing; when it's low, rates fall. This self-balances supply and demand without a central party.
Why over-collateralize instead of just selling?
Common reasons: getting liquidity without selling an asset (avoiding a taxable event or keeping upside exposure), gaining leverage, or accessing a different asset — for example, borrowing a stablecoin against ETH.
Why it matters. DeFi lending rebuilds a bank's core function — matching savers with borrowers — as open code with no loan officer deciding who gets access. The price of removing the gatekeeper is that there's no one to chase a defaulter, so the system substitutes math for trust: you must always post more than you take. Understanding that trade is understanding why DeFi credit works at all.