Lending and borrowing services on Web3

The bank receives deposits, saves part of them to be able to repay in case the owner wants the cash back, and offers the other part as a loan in the market at a certain interest rate. The loan can be collateralized or non-collateralized, depending on the risk of the loan taker. The interest rate is set high enough to generate revenue for the bank and the depositor. Certain protocols on-chain reproduce a similar mechanism, as we will describe in this section.

At the time of writing, the main lending and borrowing protocols only work with collateralized loans. The process resembles a mortgage where the user provides the house as collateral as insurance for the loan payment. If the loan is not repaid in full, the bank keeps the house. In this case, if the collateral ratio of the loan is not maintained, the protocol liquidates the collateral.

Let’s imagine that Alice wants to invest in a project in USD stablecoin but her collateral is...