Lesson 8: DeFi Lending and Borrowing

🎯 Core Concept: Over-Collateralized Lending

DeFi protocols like Aave and Compound allow for permissionless lending and borrowing. Unlike TradFi, which relies on credit scores, DeFi relies on Over-Collateralization. To borrow $100 worth of USDC, you might need to deposit $150 worth of ETH as collateral.

📚 How It Works

The Mechanics:

1. Deposit collateral (e.g., $150 ETH)
2. Borrow against it (e.g., $100 USDC)
3. If collateral value drops near debt value → automatic liquidation

Use Cases for Borrowing:

• Leverage: Borrow against an asset to buy more of that asset
• Tax Efficiency: Access liquidity without selling (avoiding capital gains)
• Short Selling: Borrow an asset to sell it, hoping to buy back cheaper

📚 Health Factors

The Health Factor determines loan safety:

$$H_f = \frac{Collateral \times Liquidation\ Threshold}{Debt}$$

• H_f > 1: Position is safe
• H_f < 1: Position is liquidated

Interactive DeFi Protocol Explorer

Use this interactive tool to explore and compare different lending protocols:

🔑 Key Takeaways

1. Over-Collateralization: You must deposit more than you borrow
2. No Credit Checks: Access is permissionless, based on collateral only
3. Automatic Liquidations: If collateral drops, position is liquidated
4. Health Factor: Monitor this metric to avoid liquidation
5. Interest Rates: Determined algorithmically by supply and demand

Next Lesson: In Lesson 9, we'll explore stablecoins and stability mechanisms.