Lending Protocol
A DeFi application that lets users lend crypto to earn interest and borrow crypto against collateral.
Lending protocols like Aave and Compound work like decentralized banks. Depositors supply assets (like USDC) and earn interest. Borrowers put up collateral (like ETH) and borrow against it, paying interest.
The interest rates are set algorithmically based on supply and demand. When lots of people want to borrow USDC, rates for lenders go up. When there's excess supply and fewer borrowers, rates drop.
For USDC holders, lending protocols are one of the simplest ways to earn yield. You deposit USDC and earn variable interest, usually 2-8% APY depending on market conditions. Your deposit can be withdrawn at any time (it's not locked up).
The main risks are smart contract bugs and extreme market events that could affect the protocol.
Related Terms
DeFi (Decentralized Finance)
Financial services built on blockchain smart contracts that operate without traditional intermediaries like banks.
Yield
The return earned on deposited or lent cryptocurrency, expressed as an interest rate.
APY (Annual Percentage Yield)
The total return on a deposit over one year, including compound interest.
Collateral
Assets pledged as security for a loan. In DeFi, you deposit crypto collateral to borrow other assets.
Liquidation
The forced sale of collateral when a borrower's collateral value drops below the required minimum ratio.
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This definition is provided for educational purposes. USDC.org is an independent resource and is not affiliated with Circle Internet Financial.