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Understanding Lending Protocols: Assets, Rates, and Risks

•Superlend Team
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Lending protocols are one of the biggest forces behind DeFi, with over $56.7 billion in Total Value Locked. Aave, the biggest lending platform, holds the number one spot for all of DeFi TVL on DeFiLlama.

They allow anyone, anywhere, to lend or borrow crypto assets without needing a traditional bank. But how do they actually work, and what should you know before you dive in?

In this quick guide, we’ll break down the basics:

  • What assets you can supply or borrow

  • How DeFi lending interest rates are set

  • The main risks to keep in mind

Whether you’re new to DeFi lending or looking to sharpen your understanding, this overview will help you make sense of the moving parts.

📌 1. What Assets Are Involved in DeFi Lending?

Most lending protocols support a range of crypto assets. The most common are:

  • Stablecoins (like USDC, DAI, USDT): These are popular for lenders who want steady returns without the volatility of regular crypto. Stablecoins are designed to maintain a value pegged to a real-world currency (usually the US dollar). This means when you lend stablecoins, you’re less exposed to big price swings and your $1 stays close to $1.
    That’s why many people use stablecoins as a way to earn passive income on idle funds. Instead of just holding them in a wallet, you can supply them to a lending pool and earn interest often higher than traditional savings accounts, while keeping your principal relatively stable.
  • Major tokens (like ETH, BTC): Many borrowers use these as collateral or borrow them to take leveraged positions. For example, someone might deposit ETH as collateral and borrow stablecoins to trade or invest elsewhere, without selling their ETH. Others borrow ETH or BTC directly to amplify their exposure, aiming to profit from price swings.
    Lending these major tokens can earn you higher yields compared to stablecoins, but remember: their prices can be volatile, which can affect the health of borrowers’ positions and, in extreme cases, impact liquidity in the pool.
  • Long-tail or niche tokens: Some platforms list smaller or newer tokens that aren’t as widely traded as stablecoins or major assets. These can offer higher yields to attract lenders, but they’re riskier and often less liquid.
    Because fewer people supply and borrow these tokens, it can be harder to withdraw your funds quickly, and price swings can be extreme. If you’re considering lending niche tokens, it’s important to understand the project behind the token and the market demand and be prepared for higher risk in exchange for potentially higher returns.

When you supply an asset, you’re adding it to a shared pool (the liquidity pool). Other users can then borrow from that pool. In return, you earn interest.

📈 2. How Are DeFi Lending Interest Rates Determined?

Unlike traditional banks that fix rates behind closed doors, DeFi lending rates are dynamic. They’re usually based on supply and demand for each asset.

Here’s how it works:

  • When many people lend an asset but few are borrowing, the interest rates tend to drop.

  • When more people want to borrow, rates go up to attract more liquidity from lenders.

  • Most protocols use something called an Interest Rate Model (IRM) to adjust rates automatically.

Some advanced DeFi lending protocols even have variable models that adapt more smoothly to large inflows or outflows. This helps keep things balanced and ensures there’s always enough liquidity for borrowers and lenders alike.

⚠️ 3. What Are the Main Risks of DeFi Lending?

Lending in DeFi can be rewarding, but it’s not risk-free. Here are the main things to watch out for:

  • Smart Contract Risk: Bugs or exploits in the code can lead to losses.

  • Liquidity Risk: If too many users withdraw at once or borrowers can’t repay, you might not be able to pull out your funds instantly.

  • Volatility Risk: If you lend volatile tokens instead of stablecoins, price swings can affect your position.

  • Protocol Risk: Some newer or smaller protocols might not be as battle-tested as big names like Aave or Compound.

Always do your research, and consider using protocols that have been audited and used by many people over time.

✅ Final Thoughts

DeFi lending makes it possible for your idle crypto to work for you, but it’s important to understand how assets, rates, and risks all connect.

At Superlend, we help users access deep liquidity and optimized rates across multiple markets, with tools to manage risks more easily.

If you’re ready to put your stablecoins to work or want to explore different strategies, check out lending opportunities across 350+ money markets and vaults here.