Clear DefinitionsBorrowing Protocols
1 min read
Pronunciation
[bor-oh-ing proh-tuh-kawls]
Analogy
Like a pawn shop where you leave a valuable item (collateral) and receive a loan (borrowed tokens), with automatic sale if you don’t repay.
Definition
Smart‑contract systems that allow users to deposit assets as collateral and borrow other tokens against that collateral. They automate interest rates and liquidation processes without intermediaries.
Key Points Intro
Borrowing protocols enable decentralized lending markets by matching lenders and borrowers via on‑chain rules.
Key Points
Collateralization: Requires over‑collateral to secure loans.
Interest model: Uses variable or fixed rates determined by supply/demand.
Liquidation: Automatically sells collateral when health factor falls below threshold.
Governance: Parameters and risk controls set by token holders.
Example
On Aave, a user deposits 100 DAI as collateral and borrows 50 USDC; if the DAI value drops, the protocol liquidates part of the collateral to cover the loan.
Technical Deep Dive
Protocols maintain per‑asset liquidity pools; interest rates follow a utilization curve. Health factor = (collateral_value × LTV) / borrowed_value. Liquidators trigger `liquidate()` on under‑collateralized positions, receiving a bonus incentive.
Security Warning
Oracle manipulation or sudden price swings can trigger unfair liquidations; ensure robust price feeds and proper liquidation incentives.
Caveat
High volatility assets may incur frequent liquidations; choose collateral with stable value.
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