A lending pool combines supplied assets so borrowers can access liquidity without negotiating a separate loan with each supplier. Smart contracts track deposits, debts, interest, and borrowing limits. Depending on the protocol, separate pools may serve different assets or markets with different collateral rules.
Where the return comes from
Borrowers typically pay interest, part of which accrues to suppliers after the protocol’s applicable share or charges. Rates may respond to utilization: the relationship between borrowed funds and the market’s supplied funds. Token incentives can add a separate return, but should not be confused with interest paid by borrowers.
Collateral-backed borrowing usually requires eligible collateral and can trigger liquidation when the position becomes insufficiently secured. Not every deposited collateral asset earns interest; that depends on its role in the market.
Available liquidity matters
A supplier’s balance is a claim under the pool’s rules, not a promise that all funds remain idle. If much of the supplied asset is borrowed, immediate withdrawals may be constrained until repayments or new deposits restore liquidity.
Oracle errors, contract flaws, collateral price shocks, and ineffective liquidations can cause losses or bad debt. Pool size alone does not establish loan quality.