/ How DeFi lending works
A DeFi lending protocol is a pool-based money market. Suppliers deposit assets into a shared pool and earn interest; borrowers post collateral and draw against it, paying interest that flows back to suppliers. Rates are set algorithmically by utilization — the higher the share of a pool that's borrowed, the higher the rate climbs, which incentivizes more supply and discourages further borrowing. Everything is overcollateralized: you must post more value than you borrow, because there's no credit check, only code.
This overcollateralization is what makes permissionless lending possible. Because a borrower always has more collateral locked than debt outstanding, the protocol can liquidate the position automatically if the collateral value falls too close to the debt, protecting suppliers. The trade-off is capital inefficiency — you can't borrow more than you put in — which is why DeFi lending is used mainly for leverage, shorting, and liquidity without selling, not for unsecured credit.
/ Comparing lending protocols
Start with the rates, but read both sides: a high supply APY is only attractive if it's organic (driven by real borrowing demand) rather than a temporary token-incentive subsidy that will evaporate. Check the utilization curve and whether the headline yield includes reward emissions. On the borrow side, compare the interest rate against the loan-to-value ratio you're allowed and the liquidation threshold, because those determine how much you can safely draw and how much buffer you have before liquidation.
Then weigh the risk parameters that don't show up in the APY: which collateral assets are accepted and at what LTV, how isolated or cross-collateralized the markets are, and how the protocol prices collateral (oracle dependency). A protocol that lists volatile long-tail collateral at aggressive LTVs is structurally riskier than one that's conservative, regardless of which advertises a better rate. Our individual reviews document each protocol's parameters and risk posture.
/ Liquidation and collateral risk
Liquidation is the defining risk of borrowing in DeFi. If your collateral's value falls — or your borrowed asset's value rises — until your position crosses the liquidation threshold, liquidators repay part of your debt and seize your collateral at a discount, and you eat the penalty. In volatile conditions this can happen fast, and on congested chains a spike in gas can prevent you from topping up collateral in time. Borrow well below the maximum LTV to keep a safety buffer.
Suppliers face different risks: smart-contract exploits, oracle manipulation that lets bad debt accrue, and the possibility that a sharp crash leaves the protocol with undercollateralized positions it can't fully liquidate, socializing the loss. The blue-chip protocols mitigate these with conservative parameters, audits, and reserve buffers, but no money market is risk-free. Diversify, prefer protocols with strong track records, and treat outsized yields as a signal to investigate, not to pile in.
/ Which lending protocol should you use?
Aave is the category's blue-chip standard — the deepest liquidity, the longest track record, broad multi-chain deployment, and conservative, well-audited risk parameters. For most suppliers and borrowers it's the safe default. Newer or specialized money markets can offer better rates or novel features (isolated markets, higher LTVs on specific assets), but they trade some battle-tested security for that edge, so size your exposure accordingly.
Use the comparison table to see the lending protocols we cover and their key parameters, then read the individual reviews for liquidation mechanics and security history before depositing or borrowing.