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Lending and Borrowing 101

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Key Takeaways

  • Lending and borrowing lets you put your assets to work. Earn passive income by lending or unlock liquidity without selling through borrowing. Assets do not have to sit idle.
  • Liquidity Pools and Smart Contracts are important. Automation ensures efficiency, but security risks exist. Stick to well-audited platforms and check liquidity levels before participating.
  • Risk management is crucial. Liquidation risks, interest rates, and platform security all play a role. Understand loan-to-value (LTV) ratios and always be ahead of the curve.
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New to DeFi?

Check out our DeFi 101 Guide for beginners for a deeper dive into how DeFi works and why it matters.

Ronin users now have the power to put their assets to work like never before. Whether you’re stacking yield on your hard-earned tokens or unlocking liquidity without selling—lending and borrowing can open up new ways to level up your Web3 gaming and investment strategies.

Imagine using your in-game assets to fund your next adventure—or earning passive income while staying engaged in the ecosystem. Let’s break it down.

Why It Matters

  • Passive Income: Put idle assets to work.
  • Leverage Strategies: Borrow to trade or reinvest.
  • Capital Efficiency: Maximize the utility of your holdings without selling.

🤝 Lending: Earn While You HODL

Lending on the other hand allows you to earn passive income by supplying liquidity to borrowers. Instead of keeping assets idle, you can deposit them into lending pools and earn interest.

How does it work?: DeFi lending removes intermediaries and runs on smart contracts—self-executing agreements that automate lending, borrowing, and liquidation processes. This ensures efficiency, transparency, and security.

Common Types of Lending

  • Peer-to-Peer Lending: Direct lending between individuals.
  • Institutional Lending: Providing funds to financial institutions.
  • DeFi Lending: Depositing assets into decentralized smart contract-based lending pools.
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Key Considerations for Lenders

  • Risk vs. Reward: Higher yields often mean greater risk. Do your own research first.
  • Platform Security: Centralized platforms carry counterparty risks, while DeFi platforms depend on smart contract security.
  • Liquidity Needs: Some lending protocols lock up funds for a set period, while others allow flexible withdrawals.

🤝 Borrowing: Get Liquidity Without Selling

Borrowing lets you access funds by putting up collateral—meaning you don’t have to sell your assets to get liquidity or funds. Instead, you lock them up as security while taking out a loan.

Common Types of Borrowing

  • Collateralized Loans: This type of loan requires assets (e.g. tokens) as collateral. If the borrower fails to repay, the lender can seize the collateral.
  • Unsecured Loans: On the other hand, this type does not require collateral at all. These typically have higher interest rates due to increased risk.
💡 What Is Collateral? Collateral is any asset pledged to secure a loan. If a borrower doesn’t repay, the lender can claim the collateral to recover losses. In crypto, common collateral can be ETH, BTC, or stablecoins (USDC, USDT). Higher valued collateral means higher borrowing limit.
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Key Considerations for Borrowers

  • Interest Rates: This can be fixed or variable, which will impact your total repayment amount to the one you borrowed from.
  • Loan-to-Value (LTV) Ratio: Determines how much you can borrow based on what you put up as collateral. Keep in mind—the higher your LTV is, the higher the risk.
  • Liquidation Risks: If your collateral value drops below a certain threshold, it may automatically be liquidated.

Learn about liquidation risks with real-world examples—check out the DeFi 101 and DeFi Risks guides.

The Role of Lending Pools

Liquidity pools play a crucial role in DeFi lending by ensuring that funds are available for borrowers.

What They Do

  • Shared Lending Pool: Borrowers don’t have to wait for individual lenders, they access a pool of funds.
  • Instant Liquidity: Loans are available immediately as long as collateral is provided.
  • Risk Management: If a borrower’s collateral value drops, smart contracts automatically liquidate it to protect lenders.
  • Distributed Risk: Risk is spread across multiple lenders instead of one person absorbing all potential losses.

What’s Next For Me?

Lending and borrowing unlocks new ways to maximize your assets in DeFi and crypto in general. Whether you’re earning or accessing liquidity, understanding the risks and rewards is key to making the most of these opportunities.

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Borrowing & Lending on Ronin

With Compound, you can put your idle RON, wETH and USDC in your Ronin Wallet to work!

If you’re looking to earn

Start by checking interest rates—higher rates offer better returns but may come with more risk.

If you’re looking to borrow

Keep an eye on your collateral and LTV ratio to avoid unexpected liquidations.

Learn more about it here.

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Want to Learn More?

  • Not familiar with smart contracts? Check out our DeFi 101 Guide for beginners for a deeper dive into how DeFi works and why it matters.
  • Worried about risks? Read our guide on DeFi Risks to understand vulnerabilities like smart contract exploits, price manipulation, and liquidation risks.