DeFi lending on fingers: a bank made of smart contracts without a banker

A lending protocol is a money market made of smart contracts: depositors put assets into a pool and earn interest, borrowers draw from the pool against collateral. No managers, no applications, no credit history.

Three mechanics instead of a bank

• Overcollateralization instead of trust. Want to borrow $100 - lock up $150+. The protocol does not know who you are, so it insures itself with math: the collateral must always cover the debt with a margin.
• A utilization-driven rate. The interest is set by a curve: the larger the share of the pool lent out, the higher the rate - the market balances supply and demand itself, no committee.
• Liquidations instead of collectors. The collateral sinks to the threshold - anyone can repay your debt and take the collateral at a discount. An army of bots does it in seconds.

Why borrow against your own money

The main case is liquidity without selling: borrow stables against BTC/ETH without selling the position (and without creating a taxable event). The second - leverage: borrowed stables → bought more of the asset → locked it up. The third - a short: borrowed the token → sold it → buy back cheaper if you are right.

The risks are vintage: the smart contract, the price oracles, cascade liquidations in a crash, and "bad debt" if liquidations did not keep up. The continuation - in the breakdown of liquidations.