What is a Lending Protocol?

A lending protocol in decentralized finance (DeFi) allows users to lend and borrow cryptocurrencies or tokens without relying on centralized financial institutions. These protocols use smart contracts to automate the lending process, with interest rates determined by supply and demand dynamics within the system. Borrowers collateralize their loans, and lenders earn interest on their deposited funds. Lending protocols like Compound and Aave have become integral parts of the DeFi ecosystem, offering users greater financial flexibility and the ability to earn passive income.