Borrowing protocol

A borrowing protocol is a blockchain-based system, often implemented through smart contracts, that lets users borrow one crypto asset by depositing another asset as collateral. The protocol defines which assets can be used as collateral, how collateral requirements are calculated, how interest rates are set, and how loans are created, maintained, and repaid. If collateral value falls below the protocol’s required threshold, the protocol can trigger liquidation logic to restore collateral coverage. Borrowing protocols can be structured as peer-to-peer or pool-based systems, where lenders supply assets to shared pools and borrowers borrow from available liquidity.

For example, if a user deposits ETH as collateral in a borrowing protocol and borrows USDC against it. If the value of ETH falls enough to breach the required collateral ratio, the protocol may liquidate part of the collateral to repay the loan.