Glossary
Lending Protocol
An on-chain market where users deposit assets to earn interest and others borrow against over-collateralized positions, with rates set algorithmically.
A lending protocol like Aave or Compound pools deposits and lends them out to borrowers who post collateral worth more than the loan. Interest rates are set by a formula keyed off pool utilization, so they rise when liquidity gets scarce and fall when it is abundant.
If a borrower's collateral ratio drops below the protocol's liquidation threshold, anyone can repay part of the debt and seize part of the collateral at a discount — the mechanism that keeps the system solvent without a credit officer.