Lending Protocols (Aave / Compound) · question
Q.02 of 17
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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