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Finematics - Lending And Borrowing In DEFI Explained - Aave, Compound

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Community upload. AI output has not been independently verified.
Author: Finematics
Categories: Crypto
Tags: crypto
Views: 1 · Last viewed: 2026-10-13 11:24 UTC

Short Summary

Main recommendation: DeFi lending and borrowing, using protocols such as Aave and Compound, lets users lend and borrow crypto through smart contracts while keeping custody of their assets, unlike centralized (CeFi) platforms such as BlockFi or Celsius. The video explains how supply and borrow rates are set by supply and demand, how overcollateralized loans and liquidation work, and how the two protocols differ, with Aave offering stable borrow rates and flash loans.

Key Points

  • CeFi lenders take custody of deposited assets and are exposed to hacks or negligence, whereas DeFi lending runs on smart contracts (predominantly Ethereum) without requiring personal details or trusting a third party with funds.
  • Almost all DeFi loans are overcollateralized: borrowers must supply collateral worth more than the loan, which lets them access cash without selling tokens (e.g., to cover expenses, delay capital gains taxes, or increase leverage).
  • Borrowing capacity is limited by available market liquidity and each token's collateral factor. DAI and ETH have a 75 percent collateral factor on Compound, so up to 75 percent of their value can be borrowed against.
  • Interest rates are variable and calculated per Ethereum block based on the ratio of supplied to borrowed tokens, so the borrow APY is always higher than the supply APY in a market.
  • Compound and Aave differ: Aave offers a stable borrow APY (fixed in the short term) and flash loans (borrowing with no upfront collateral within one Ethereum transaction); Compound uses cTokens whose exchange rate rises over time, while Aave's aTokens are pegged 1:1 and interest is added directly to balances.

Details Worth Noting

  • Concrete instructions: The video gives no step-by-step procedure for supplying or borrowing. Actionable points it does provide are: check the collateral factor and available liquidity of a market before borrowing; keep the borrowed value below the collateral value times its collateral factor; monitor interest rates regularly, since rates can change sharply; and remember that cTokens/aTokens are required to redeem the underlying asset.
  • Worked example (Compound): with an exchange rate of 0.021, depositing 10 ETH yields about 476.19 cETH. After a month of interest accrual, redemption returns about 10.0165 ETH, roughly a 0.16 percent return for that month.
  • Collateral is locked while in use: collateral earns interest, but it cannot be redeemed or transferred while backing a loan.
  • Price feeds differ: Compound uses its own price feed drawing on several liquid exchanges, while Aave relies on Chainlink and falls back to its own feed if needed.
  • Liquidation risk is real: if collateral value falls below the required level, it is liquidated to repay the loan, and the accrued interest must be repaid to unlock collateral.
  • Rate volatility example: during a yield farming craze, the COMP APY on the BAT token rose above 40 percent, which could catch users who don't monitor rates daily off guard.
  • The video notes DeFi still carries smart contract risk. These are the speaker's explanations, not professional financial advice.

Bottom Line

DeFi lending offers self-custody and open access, but borrowers must manage overcollateralization, liquidation thresholds, and quickly changing variable rates, and smart contract risk remains.