Lending Pool

A lending pool is the shared reservoir of capital that a decentralized lending protocol uses to match many depositors with many borrowers at once, rather than pairing individual lenders and borrowers directly. When a user deposits an asset, the smart contract mints a receipt token, such as Aave's aTokens or Compound's cTokens, representing their claim on the pool plus accrued interest, which keeps funds liquid and transferable even while they earn yield.

Interest rates inside a lending pool are not set by a bank or a committee. Most protocols use an algorithmic "kinked" curve tied to utilization, the share of deposited funds currently borrowed. Rates rise gradually as utilization climbs toward a target level, then increase sharply beyond it, a design meant to keep enough liquidity available for withdrawals while pulling in fresh deposits when demand for loans is high.

Because there is no credit check or identity verification, borrowers must post collateral, typically worth more than the loan itself, an approach known as overcollateralization. Common collateral includes stablecoins, wrapped Bitcoin, or Ether. If the collateral's value falls too close to the loan's value, the position can be automatically sold off in a liquidation to protect depositors from loss.

Lending pools carry risks beyond normal market volatility: smart contract bugs, oracle price manipulation, and cascading liquidations during sharp downturns have all triggered losses across major DeFi protocols. Even so, lending pools remain one of the most widely used building blocks in decentralized finance, underpinning leveraged trading, yield strategies, and on-chain credit markets.