DeFi Lending 101: How to Earn Interest and Borrow Without a Bank

TL,DR: DeFi lending creates shared pools of crypto where you can deposit to earn interest or post collateral to borrow, all enforced by smart contracts. Rates adjust with supply and demand, liquidations happen automatically if collateral value drops too far, and you keep control of your wallet. Peridot’s goal is to make this experience simpler across chains, so more people can use lending without jumping through hoops.

What DeFi lending is, in plain language

In a pool based system, many users supply assets into a contract that other users can borrow from. The contract keeps track of balances, sets variable interest based on how full the pool is, and handles liquidations when risk becomes too high. Classic examples include Aave or Compound, which you may have heard about, but we will keep the focus on how the mechanism works and why it matters for you.

How you earn interest

1. Supply a supported asset to a market.

2. Receive a token that represents your deposit, which updates to reflect accrued interest.

3. Withdraw at any time, provided there is liquidity in the pool.

The interest you earn comes from what borrowers pay. When more people borrow, utilization rises, and the variable rate for suppliers usually increases.

How borrowing with collateral works

1. Supply one or more assets and mark them as collateral.

2. The protocol assigns each asset a maximum borrowable percentage.

3. Your position has a safety indicator, often called a health factor.

4. If the health factor falls too low, a portion of your collateral can be sold to repay part of the debt, which is a liquidation.

You can keep the position safe by adding collateral, repaying part of the loan, or both.

A simple example

You deposit 1,000 USDC. The market allows borrowing up to, for example, 70 percent of the collateral value. You borrow 400 USDT. If USDC falls in price or if your borrowed asset increases in price, your health factor declines. You restore safety by repaying a part of the loan, by adding more collateral, or by doing both.

Why smart contracts replace banks here

• Rules in code: eligibility, rates, and liquidations are encoded and transparent.

• Market driven rates: utilization drives interest rather than a credit committee.

• Self custody: you use your own wallet, so there is no account manager and no paperwork.

Benefits, and where Peridot helps

• Open access: anyone with a wallet can participate.

• Earn while holding: idle assets can generate yield when supplied to a pool.

• Clear, predictable mechanics: you can track the health factor, collateral value, and rates in real time.

• Cross chain ease with Peridot: Peridot is building a unified experience so you can manage lending and borrowing across chains with fewer steps, fewer interfaces, and clearer guidance, including friendlier risk checks during volatile markets.

Basic risks you should know

• Volatility and liquidation risk: price moves can push your position toward liquidation. Borrow conservatively, and monitor the health factor.

• Smart contract and governance risk: bugs, parameter changes, or oracle issues can affect markets. Prefer audited, widely used protocols and read change logs.

• Rate risk: variable rates can rise quickly when utilization spikes.

• Operational risk: sending the wrong token or using the wrong network can cause loss. Double check addresses and networks before every transaction.

Getting started safely

1. Begin with a small test amount.

2. Borrow well below the maximum, aim for a comfortable safety buffer.

3. Keep some stablecoins ready to repay during volatility.

4. Use interfaces that explain risks clearly. If you want a simpler, cross chain path, review Peridot resources and learn how Peridot guides you through supply, borrow, and repay steps with fewer surprises.