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of 17What are DeFi lending protocols and how do they differ from traditional banking?
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DeFi lending protocols are decentralized financial applications built on blockchain networks that allow users to lend and borrow cryptocurrencies without intermediaries like banks. The key differences from traditional banking include:
- Decentralization: No central authority controls the protocol
- Permissionless: Anyone with a wallet can participate
- Transparency: All transactions are recorded on-chain and publicly visible
- Global Access: Available 24/7 to anyone with internet access
- Programmable: Smart contracts automate lending/borrowing processes
- Over-collateralization: Borrowers must provide collateral worth more than the loan
Traditional banks rely on credit scores and legal frameworks, while DeFi protocols use smart contracts and over-collateralization to manage risk.
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Explain the basic mechanics of how Aave and Compound work.
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Both protocols operate on similar principles:
Aave:
- Users deposit assets into liquidity pools and receive aTokens (e.g., aUSDC for USDC deposits)
- aTokens represent the user's share of the pool and accrue interest automatically
- Borrowers can take loans against their collateral at variable or stable interest rates
- Interest rates are determined algorithmically based on supply and demand
Compound:
- Users supply assets to earn interest and receive cTokens (e.g., cUSDC for USDC)
- cTokens increase in value over time, representing accrued interest
- Borrowers can borrow against their cToken collateral
- Interest rates are calculated using utilization-based algorithms
Both protocols allow users to earn passive income by supplying assets and enable borrowing without selling existing holdings.
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What is collateralization and why is over-collateralization required in DeFi lending?
What are aTokens and cTokens, and how do they work?
How are interest rates determined in lending protocols?
Explain the liquidation process and how it protects the protocol.
What are the main differences between Aave v2, v3, and Compound v2, v3?
How do flash loans work and what are their use cases?
Explain the role of oracles in lending protocols and associated risks.
What is the difference between variable and stable interest rates in Aave?
How do governance tokens (AAVE, COMP) work and what rights do they provide?
Analyze the risks and trade-offs of different liquidation mechanisms across protocols.
Explain the security considerations and common attack vectors in lending protocols.
How would you design a cross-chain lending protocol and what challenges would you face?
Describe how you would implement a new interest rate model for a lending protocol.
How would you handle a black swan event (like Terra Luna collapse) in a lending protocol?
Explain the economics of lending protocols and how they generate sustainable revenue.
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Lending Protocols (Aave / Compound) cheatsheet
Lending Protocols Cheat Sheet
- Summary01
- 1. Fundamentals02
- 2. Core Components03
- 3. Core Mechanisms04
- 4. Key Protocols05
- 5. Risk Management06
- 6. Advanced Topics07
- 7. Security Considerations08
- 8. Economic Models09
- 9. Key Concepts & Comparisons10
- 10. Interview Questions & Advanced Topics11
- 10. Key Metrics & Formulas12
- + 2 more inside
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