Lending and borrowing: rates, collateral, liquidation
Supply earns, borrowing costs, and the liquidation line enforces everything. How money markets set rates without a bank.
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Pools of capital, not counterparties
Lending markets pool deposits and let anyone borrow against collateral — no credit check, because positions are overcollateralized instead. Your collateral is the entire underwriting department.
Rates follow utilization
Interest is algorithmic: when most of the pool is lent out (high utilization), rates climb to attract deposits and repel borrowers; when capital sits idle, rates fall. Borrowing into a crowded trade means paying the spike — check utilization, not just the headline rate.
Liquidation is automatic and unsentimental
If your collateral value falls near what you owe, anyone may repay your debt and claim your collateral at a discount. There is no margin call, no negotiation, no business hours. The defense is distance: borrow far below the maximum, prefer stable collateral, and know the exact price that triggers the cascade before you open the position.
Risk note: cryptocurrency trading, leveraged perpetual futures, and automated algorithmic strategies carry significant risk of rapid and total financial loss. Never risk funds you cannot afford to lose completely. Nothing in this lesson is investment advice, a recommendation, or an offer to sell any product.
Checklist
- I can explain why borrow rates rise with utilization
- I know my liquidation price before opening any borrow