Lending Protocols & Yield Strategies

Master DeFi lending mechanics, understand interest rate models, and build yield optimization strategies using protocol composability.

50 min•By Priygop Team•Last updated: Feb 2026

How DeFi Lending Works

Supply Side: Deposit tokens into a lending pool → receive interest-bearing tokens (aTokens in Aave, cTokens in Compound). Interest accrues every block
Borrow Side: Deposit collateral (e.g., ETH) → borrow up to a percentage of its value (e.g., 75% LTV). Pay variable or stable interest rates
Interest Rate Model: Rates are algorithmic — when utilization is low (lots of supply, little borrowing), rates are low. When utilization is high, rates spike to incentivize supply
Liquidation: If collateral value drops below the liquidation threshold, anyone can repay part of the debt and claim collateral at a discount (typically 5-10% bonus)
Flash Loans: Borrow any amount with ZERO collateral — but must repay within the same transaction. Used for arbitrage, collateral swaps, and self-liquidation
Isolation Mode: New or risky assets are isolated — can only borrow stablecoins against them, with strict debt ceilings. Protects the broader protocol

Simple Lending: Deposit stablecoins → earn 2-8% APY. Lowest risk, simplest strategy. Compare rates across Aave, Compound, and Spark
Liquidity Provision: Provide liquidity to DEX pools → earn trading fees (0.3% per trade). Risk: impermanent loss when prices diverge
Yield Farming: Provide liquidity AND earn governance token rewards — protocols incentivize liquidity with their native tokens. APYs can be 10-100%+
Leverage Looping: Deposit ETH → borrow stablecoins → buy more ETH → deposit again. Amplifies exposure but also amplifies liquidation risk
Delta-Neutral: Combine long and short positions to earn yield without price exposure — supply ETH on Aave while shorting ETH on dYdX
Real-World Assets (RWAs): Protocols like MakerDAO now earn yield from US Treasury bonds — bringing traditional finance yields on-chain