What is the mechanism by which DeFi lending platforms operate?

<p>Lending is a critical component of liquidity, which is at the heart of the majority of cryptocurrency markets and exchanges. One could argue that it is the lifeblood of the cryptocurrency money flow, as it provides the liquidity necessary for cryptocurrency exchanges to function. Without lending, trading different cryptocurrency pairs may result in extremely high slippage and fees, and certain small markets and exchanges may eventually cease to exist.</p> <p>Historically, "lending" has been handled by traditional banks, institutional lenders, peer-to-peer lenders, and other money markets. Lenders earn money by charging interest on the capital they lend to borrowers. Financial institutions offer a variety of loan products, including certificates of deposit (CDs), repurchase agreements (Repos), commercial papers, treasury bills (T-Bills), and money market mutual funds.</p> <p>You may not realise it, but if you have money deposited in a bank savings account, you typically earn a negligible annual interest rate because you are technically a "lender" and can earn interest on your deposited funds.</p> <p>"Lending" can be facilitated in the cryptocurrency space via the CeFi (centralised finance) and DeFi (decentralised finance) protocols. The former entails lending your cryptocurrency to CeFi platforms, which are occasionally referred to as "crypto banks." The disadvantage is that they will retain full custody of your crypto assets throughout the lending programme, and you will be required to complete a KYC (know-your-customer) application. As such, it negates the entire point of cryptocurrency being decentralised, and additionally exposes you to hacking, insider trading, and bad loans.</p> <p>This is why the majority of people prefer the latter as a more convenient and secure method of "lending." Individuals can lend out their cryptocurrency assets via DeFi protocols without submitting a KYC form or relinquishing custody of their tokens. Anyone with a cryptocurrency wallet can effectively participate in DeFi len