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Q: What are DeFi lending protocols and how do they differ from traditional banking?

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Q: Explain the basic mechanics of how Aave and Compound work.

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Q: What is collateralization and why is over-collateralization required in DeFi lending?

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Q: What are aTokens and cTokens, and how do they work?

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Q: How are interest rates determined in lending protocols?

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Q: Explain the liquidation process and how it protects the protocol.

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Q: What are the main differences between Aave v2, v3, and Compound v2, v3?

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Q: How do flash loans work and what are their use cases?

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Q: Explain the role of oracles in lending protocols and associated risks.

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Q: What is the difference between variable and stable interest rates in Aave?

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Lending Protocols (Aave / Compound) Interview Questions

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What are DeFi lending protocols and how do they differ from traditional banking?

beginner

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.

Explain the basic mechanics of how Aave and Compound work.

beginner

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.