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An on-chain lending protocol is a decentralized liquidity protocol where users can participate as suppliers or borrowers.
Suppliers provide liquidity to the market while earning interest, and borrowers can access liquidity by providing collateral that exceeds the borrowed amount.
When you supply funds, you typically receive a receipt token that represents your deposit plus accumulated interest.
Rates in lending markets are generally variable and depend on utilization, meaning yields can rise when borrowing demand is high and fall when demand drops. Lending carries smart contract risk and also economic risk if collateral assets used by borrowers behave unexpectedly or become illiquid. If you borrow against collateral, liquidation risk becomes critical: if your collateral value falls below required thresholds, the protocol can sell your collateral to repay your debt, usually with a penalty. Even if you only supply assets, extreme market stress can reduce liquidity and may delay withdrawals.