Lending protocol (crypto loans)
A lending protocol is a smart contract through which users lend tokens and borrow against deposited collateral, with no bank.
Explained simply
Lenders deposit tokens into a shared pot and earn interest. Borrowers deposit collateral (usually more than 100 percent of the loan value) and withdraw other tokens against it.
No person sets the interest rate; a formula does: if the pot is nearly empty the rate rises, if it is full the rate falls. If a collateral's value drops below a threshold, it is sold automatically.
Because everything is over-collateralised there is no credit check. In return, a coding error or a price crash can quickly become expensive.
From the familiar world
A Lombard loan at the bank: you pledge your securities account and receive a loan up to a share of its value. If the account value falls, the bank demands a top-up or sells. The lending protocol does exactly that, only automatically and without a bank.
An example
An entrepreneur holds Ether, needs short-term liquidity but does not want to sell. He deposits Ether in the protocol and borrows stablecoins. After three months he repays and gets his collateral back.
Why it matters
Lending protocols are the heart of DeFi and where most crypto "interest" originates. The principle is familiar to banks (Lombard lending), the risks are not (code, crashes, no supervision).
To pass on
„A lending protocol is a Lombard loan as a vending machine: collateral in, loan out, and if prices crash the program sells on its own.“
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