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Lending and borrowing

Collateral, loan health and automatic liquidation.

5 minChecked 4 October 20265 sources

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Lending protocol
Collateral$10,000 of ETH
Example numbers based on a lending protocol's published example, not live prices.

Step 1 of 5

Deposit collateral

On a lending protocol such as Aave, you deposit crypto as collateral: here, ether worth $10,000.

  1. Lending protocol
    Collateral$10,000 of ETH

    Step 1 of 5

    Deposit collateral

    On a lending protocol such as Aave, you deposit crypto as collateral: here, ether worth $10,000.

  2. Lending protocol
    Collateral$10,000 of ETH
    Borrowed: $6,000Of a stablecoin. No credit check.

    Step 2 of 5

    Borrow less than it is worth

    You can borrow less than your collateral is worth: here, $6,000 of a stablecoin. There is no credit check, because the collateral secures the loan.

  3. Lending protocol
    Collateral$9,000 of ETH
    Borrowed: $6,000Of a stablecoin. No credit check.
    Health factorHealth 1.20 · collateral $9,000Liquidation below 1.00

    Step 3 of 5

    Watch the health factor

    The protocol tracks a health factor: here, the collateral counted at 80% of its value, divided by the debt. It starts at 1.33. Below 1, the loan can be liquidated. Try it below.

    Try it

    Collateral $9,000, health factor 1.20. The loan is safe for now.

  4. Lending protocol
    CollateralPart of it taken by a liquidator
    Borrowed: $6,000Of a stablecoin. No credit check.
    Health factorHealth 0.99 · collateral $7,400Liquidation below 1.00
    LiquidatedSomeone repaid debt and took collateral at a discount

    Step 4 of 5

    Liquidation is automatic

    If ether falls 26%, the collateral is worth $7,400 and the health factor drops below 1. Anyone can then repay part of the debt and take some of the collateral at a discount.

  5. Lending protocol
    CollateralPart of it taken by a liquidator
    Borrowed: $6,000Of a stablecoin. No credit check.
    About $31 billion borrowedAll lending protocols, 4 Oct 2026
    April 2026Tokens from a bridge exploit used to borrow about $193 million

    Step 5 of 5

    What can go wrong

    Prices can fall faster than you can react. About $31 billion was borrowed across lending protocols on 4 October 2026. In April 2026, an attacker used tokens released by a bridge exploit as collateral to borrow about $193 million from Aave. Aave's own code was not broken, but some lenders could not withdraw for a time.

Example numbers based on a lending protocol's published example, not live prices.

Quick check

Did it stick?

2 questions. Get them right to complete the lesson.

Question 1

Question 1 of 2

Why is there no credit check?

Question 2

Question 2 of 2

What happens when the health factor falls below 1?

Or skip ahead to lesson 10: Tokenised assets.

Sources

Checked 4 October 2026
  1. LiquidationsAave Help Center
    • The health factor is the collateral counted at its liquidation threshold (80% here) divided by the debt: $10,000 of ether against $6,000 gives 1.33.
    • Below a health factor of 1, the loan can be liquidated.
    • If ether falls 26%, the collateral is worth $7,400 and the health factor drops to about 0.99, below 1 (arithmetic from the formula).
    • Anyone can then repay part of the debt and take some of the collateral at a discount.
  2. Aave V3 overviewAave documentation
    • On a lending protocol such as Aave, you deposit crypto as collateral and borrow less than it is worth.
  3. DeFi lending: intermediation without information?Bank for International Settlements (Bulletin 57)
    • Borrowers are anonymous, so loans are secured by collateral rather than a credit check.
  4. Protocols dataDefiLlama
    • About $31 billion was borrowed across lending protocols on 4 October 2026 (computed).
  5. rsETH incident report, 20 April 2026Aave governance forum
    • In April 2026, an attacker used tokens released by a bridge exploit as collateral to borrow about $193 million from Aave.
    • Aave's own code was not broken, but some lenders could not withdraw for a time.

Corrections to this lesson: none so far. Spotted something wrong? See how we check facts on the sources page.