Lending protocol
In short A lending protocol is a set of smart contracts that lets users lend crypto to earn interest or borrow against collateral, with no bank or credit check.
A lending protocol is a set of smart contracts that runs a money market on a blockchain. Depositors supply tokens into a shared pool and earn interest. Borrowers take tokens out of that pool by locking up other tokens as collateral. Nobody checks your identity or credit history, because the contract only looks at the value of what you have locked.
Loans are overcollateralized, meaning you must deposit more value than you borrow. Each asset has a collateral factor that sets how much you can borrow against it, and a more volatile asset usually gets a lower one. Interest rates normally come from a formula based on utilization, which is the share of the pool currently borrowed. When utilization is high, rates rise to pull in deposits and discourage new borrowing. Depositors often receive a receipt token that represents their share of the pool plus the interest it has earned.
The main risk for borrowers is liquidation. If your collateral falls in value, or your debt grows, until you cross the liquidation threshold, anyone can repay part of your debt and take your collateral at a discount. That discount is a penalty you pay, and it can wipe out a large part of your position quickly. Protocols depend on oracles for prices, so a faulty or manipulated price feed can trigger wrongful liquidations or leave the protocol with bad debt. Bad debt is what happens when collateral drops faster than liquidators can act, and depositors can end up absorbing that loss.
For token holders, lending lets you borrow against a position without selling it. It also lets traders build leveraged positions by borrowing and buying more of the same asset. Before using one, check which assets the protocol accepts, the collateral factors, where prices come from, whether it has been audited, and whether an admin can upgrade the contracts or change parameters. Be careful with small tokens as collateral, because thin liquidity makes prices easy to push around. Keep a wide buffer above the liquidation threshold, since fast moves can liquidate you before you can react.