DeFi Lending Rates Rise Sharply Amid Liquidity Demands

Crypto lending and borrowing have become increasingly popular in the DeFi space, allowing users to earn yield on digital assets or borrow against them without selling. This process usually involves depositing a supported asset into a smart contract, where it earns or pays an interest rate that adjusts with market demand.

The idea is simple: supply your digital assets, and earn or pay an interest rate based on market conditions. However, the mechanics can be complex. Rates can range from near 3 percent APY for major stablecoins during quiet periods to double digits when demand for liquidity spikes.

There are two broad models of crypto lending: DeFi lending and CeFi lending. DeFi lending involves interacting with protocols such as Aave, Compound, MakerDAO, or Morpho through smart contracts, while CeFi lending uses a centralized provider like Nexo or Ledn.

In DeFi lending, loans are usually overcollateralized, meaning you deposit more value than you borrow. This is because DeFi lending does not use traditional credit checks; instead, it relies on the value of your wallet collateral and the debt attached to it.