Definition
A lending protocol is a set of smart contracts that organizes the supply and borrowing of digital assets under predefined rules. It can connect lenders and borrowers directly or pool deposits that multiple borrowers can access.
How It Works
Suppliers deposit eligible assets, while borrowers commonly post collateral and pay interest. The protocol tracks debt and collateral values, often using price oracles, and may allow liquidation when a position becomes insufficiently collateralized. Interest rates may respond to utilization, which measures how much supplied liquidity has been borrowed.
Key Considerations
Not all protocols use the same collateral model, maturity terms or rate mechanism. Supplying assets is not equivalent to an insured bank deposit, and withdrawal capacity may depend on available liquidity. Contract failures, inaccurate prices and bad debt can affect suppliers. Borrowers must monitor their position even when there is no fixed repayment date.