Lesson 8: DeFi Lending and Borrowing

https://storage.googleapis.com/beginner-defi-crypto-concepts-gitbook-media/lesson-08/audio/lesson8%20DeFi_Lending_Overcollateralization_and_Liquidation_Math.m4astorage.googleapis.com

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.

Over-Collateralization Diagram

📚 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

Lending Protocol Flowchart

📚 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

Health Factor Calculation Visualization

🎮 Interactive: Lending Calculator

Calculate your loan health factor and liquidation price with this interactive tool:

https://defi-university-app.web.app/interactives/defi-concepts/lending-calculator.html?courseId=defi-concepts&interactionId=lending-calculatordefi-university-app.web.app

Interactive DeFi Protocol Explorer

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

DeFi Protocol Explorer | DeFi Universitydefi-university-app.web.app

🔑 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.