How to Borrow and Lend Crypto in DeFi

First decide whether you want to supply crypto to earn interest or borrow against assets you already own. In a DeFi market, supplying usually means depositing tokens into a smart contract so borrowers can use them. Your return is generally variable, not a promised rate. Borrowing means locking collateral and taking another asset out against it; you still owe the loan even if the market moves against you.

NFT-backed loans work differently. A lender may agree to lend against a specific NFT for a set period, or a platform may use a pool and its own rules to assess eligible NFTs. Not every collection or token qualifies, and NFT values can be difficult to establish. A loan offer is not a reliable valuation of your NFT.

Before choosing, ask yourself:

• Do you need a loan, or are you seeking yield on assets you can leave deposited?
• Can you afford to lose access to collateral or, in a worst case, lose it?
• Do you understand the asset, network and repayment terms?

If you cannot explain how repayment or liquidation works, do not deposit or borrow yet.

Choose a lending market only after confirming that it supports the asset and network you intend to use. Aave V3, Compound V3, Morpho Blue and Euler V2 are examples of DeFi lending products, but their markets, collateral parameters and rates can differ. A familiar name does not make every market or vault equally suitable.

Use this checklist before connecting a wallet:

1. Confirm the network and token. Similar token names can refer to different contracts. Verify the asset in your wallet and the market.
2. Read the market terms. Check supported collateral, borrowing limits, interest-rate type, withdrawal conditions and liquidation rules.
3. Check contract and governance risks. Understand which contracts hold or control assets and whether market settings can change.
4. Estimate the transaction costs. You may pay gas for approvals, deposits, borrowing and repayment. Several transactions can make a small position uneconomic.
5. Use a wallet you control. Keep recovery information private, and never sign a transaction you cannot identify.

Rates, available liquidity and network fees can change. Review the current transaction preview and market terms immediately before signing, rather than relying on a rate or quote you saw earlier.

To lend, you supply an eligible token to a market and receive whatever receipt or accounting entry that market uses to represent your claim. That representation may accrue value or change over time; learn how it works before depositing. Your tokens are not a bank deposit, and a displayed yield does not mean your principal is protected.

A careful supply process looks like this:

1. Select the exact asset and market, then inspect the current supply rate and available withdrawal liquidity.
2. Check whether the rate is variable and whether rewards, if offered, are separate from interest. Do not treat either as guaranteed.
3. Approve the token only for the intended contract and amount where the wallet allows it. An approval is permission to use tokens, not the deposit itself.
4. Review the deposit transaction details, network and gas estimate. Sign only if each matches your intention.
5. Confirm the deposit in the wallet and keep a record of the market and transaction.

You may not be able to withdraw instantly if liquidity is limited, a protocol pauses activity or a contract has a problem. Before supplying, check the withdrawal process and avoid depositing funds you may need on short notice. A high rate can reflect higher demand or risk, not a safer opportunity.

Borrow only after calculating how much collateral you can tolerate locking up and how you will repay. Most DeFi borrowing is overcollateralized: the value of your deposit must exceed the value of your debt. Each market sets its own borrowing capacity and liquidation threshold. These can change, and a sharp token-price move may put a position at risk before you can react.

A safer borrowing sequence is:

1. Choose the collateral and borrowed asset, then check the market’s live rate, liquidity and loan-to-value limits.
2. Borrow less than the maximum available. A larger safety margin gives you more room for price swings, but it cannot remove liquidation risk.
3. Estimate interest over the time you expect to borrow. Variable rates may rise, and the debt can grow while you hold it.
4. Keep funds available to repay or add collateral, and know how quickly you could act if the position approaches its threshold.
5. Review the final transaction and gas costs before approving collateral or borrowing.

Liquidation may sell some or all of your collateral and may include a penalty. Do not assume you will receive a warning or have time to respond. Borrowing to buy more volatile assets can magnify losses, so avoid taking a loan you cannot repay without favorable market conditions.

NFT loans require extra care because a unique token may have no dependable sale price or immediate buyer. An NFT lending service might match a borrower and lender directly, or use a pool with eligibility and valuation rules. The terms are specific to that service and asset; do not assume that a common DeFi token market also accepts NFTs.

Before pledging an NFT, inspect the offer line by line:

• Collateral: Is the exact token or collection accepted, and will a contract hold it during the loan?
• Repayment: What amount is due, in which asset, and by what deadline? Is interest fixed or variable?
• Default: Does missing the deadline let the lender claim or sell the NFT? Is there a grace period, and how is it defined?
• Early repayment: Can you repay early, and are any fees still due?
• Valuation and liquidity: How was the loan amount determined, and could you repay if the NFT becomes hard to sell?

Do not pledge a collectible you cannot afford to lose. Confirm the marketplace or lending contract and the transaction’s NFT transfer details in your wallet. If the service does not clearly explain custody, deadlines and default, walk away rather than relying on assumptions.

Once you borrow, check the position regularly and keep enough time and funds to respond. For token-backed loans, monitor collateral value, debt, interest rate and distance from liquidation. For NFT loans, track the repayment deadline and the exact amount due. A reminder on your calendar is useful, but it is not a substitute for checking the live position and transaction status.

To close a loan, use the market’s repayment function and repay the required asset and amount. Some markets let you repay in stages; others may require a specific token or transaction sequence. Confirm that the debt is cleared and that collateral is released back to the correct wallet. You may need to pay gas for repayment and withdrawal, so keep the network’s native token available.

If your position becomes risky, possible responses may include repaying part of the debt or adding eligible collateral. These actions cost money and may not be available during congestion, a market pause or a contract incident. Do not wait until the last moment. For an NFT loan, repay before the contractual deadline and verify that the NFT is returned; do not assume that initiating a payment automatically settles the agreement.

Keep transaction records and check wallet permissions after use. Revoke approvals you no longer need when practical, while remembering that revoking an approval is a separate transaction that may cost gas.

The most costly mistakes usually come from treating a DeFi loan like a fixed bank loan or assuming an NFT will always retain its market value. A position can change as token prices, borrowing demand, interest rates and available liquidity move. Transactions are also generally difficult to reverse once confirmed.

Avoid these errors:

• Borrowing the maximum. Leave a buffer rather than operating close to the liquidation threshold.
• Ignoring changing rates. Recheck variable rates and debt growth while a loan is open.
• Confusing a displayed yield with guaranteed income. Supply returns can fall, and withdrawals may be constrained.
• Skipping the contract and network check. A wrong network, token or malicious wallet prompt can put funds at risk.
• Using an NFT floor price as a guaranteed value. The price of a recent listing does not ensure a sale at that amount.
• Forgetting gas and approvals. Budget for all steps, and do not approve unlimited access unless you understand and accept it.
• Relying on a third party to manage the position. You remain responsible for repayment and collateral monitoring.

Smart-contract bugs, oracle problems, market stress and governance changes can cause losses even when you follow the rules. Use only funds you can afford to lose, and pause if the terms or wallet transaction are unclear.