Track 4 · Markets and DeFi · Module 20

Lending, borrowing and liquidations

Over-collateralised loans, health factors and what happens when prices fall.

Lessons: 7
Reading: 56 min
Quiz: 15 questions
Pass mark: 80%

1How crypto lending worksHow does crypto lending work, and why must borrowers put up more than they borrow?7 min
2Interest rates and utilisationHow do DeFi lending apps set interest rates?7 min
3Collateral, LTV and the health factorWhat do loan-to-value, liquidation threshold and health factor mean in crypto lending?8 min
4LiquidationsWhat happens when a crypto loan is liquidated?9 min
5Centralised lenders and the 2022 failuresHow is lending to a crypto company different from DeFi lending, and what happened to Celsius, Voyager, BlockFi and Genesis?9 min
6The risks of lending and borrowingWhat are the main risks of DeFi lending and borrowing?8 min
7The Brindlecove case: running the numbersHow do you work out the health factor, liquidation price and interest on a crypto loan?8 min

The case used in this module

The Brindlecove Labs case (made up)

Brindlecove Labs is a made-up company with a made-up token, BRDL. It keeps its day-to-day cash at Pellowmark Bank, a made-up bank. It also holds 200 ether in its own wallet. Its made-up finance lead, Maya Quist, needs about $200,000 for the next few months of bills, but would rather not sell the ether.

So she looks at borrowing a dollar stablecoin against the ether on Brackenvale Lend, a made-up lending app. The lessons use made-up numbers:

Ether at $2,500, so the 200 ether are worth $500,000.
Brackenvale's settings for ether: a loan-to-value of 75%, a liquidation threshold of 80% and a liquidation bonus of 5%.
Brackenvale's stablecoin pool charges a variable rate, which is 5% a year when the case starts.

The lessons come back to Brindlecove to run the numbers: how much it could borrow, how far ether could fall before a liquidation, and what that would cost. Some quiz questions ask about it. None of this is a suggestion to borrow, lend or buy anything.

Each module tells its own made-up Brindlecove story, so details can differ from one module to the next.

Key words

Collateral: Assets locked up as security for a loan. If the loan is not repaid, the lender can take them.¹²
Over-collateralised: Secured by collateral worth more than the loan. DeFi loans are, because lenders can't check who borrowers are.³⁴
Lending pool: A set of smart contracts holding tokens that lenders supply and borrowers borrow from.²⁵
Utilisation rate: The share of a pool that is lent out: total borrowed divided by total supplied.⁶⁵
Kink (optimal utilisation): The point on a rate curve above which the borrow rate rises much faster.⁶³
Variable rate: An interest rate that keeps changing as the pool's utilisation changes.⁷
Reserve factor: The share of borrowers' interest that a protocol keeps for its treasury instead of passing it to lenders.¹³
Loan-to-value (LTV): The most you can borrow, as a percentage of your collateral's value. At 75%, $1,000 of collateral lets you borrow $750.⁸
Liquidation threshold: The percentage of collateral value at which a loan counts as under-collateralised and can be liquidated. It is set above the LTV on Aave V3.⁹³
Health factor: Aave V3's safety measure for a loan: collateral value times liquidation threshold, divided by debt. Below 1, the loan can be liquidated.¹⁰³
Liquidation: Repaying part or all of an under-collateralised loan with the borrower's collateral, done by outside liquidators or the protocol.¹⁰¹¹
Liquidation bonus: Extra collateral a liquidator receives on top of the value of the debt it repays. It is the borrower's cost.¹¹²
Close factor: The most of a loan that can be repaid in a single liquidation.¹²¹³
Flash loan: A loan with no collateral that must be borrowed and repaid within one transaction.¹¹⁴
Bad debt: A loan worth more than its collateral, so liquidating it cannot repay it in full.¹⁵¹⁶
Collateral chain: Using borrowed tokens as collateral for another loan. It makes leverage in DeFi hard to measure.⁴¹⁴

Sources

Glossary. Aave Protocol Documentation, page read 24 October 2026.
Decentralized finance (DeFi). ethereum.org, page updated 22 October 2026; read 24 October 2026.
Aave V3 Overview. Aave Protocol Documentation, page read 24 October 2026.
DeFi lending: intermediation without information? (BIS Bulletin No 57). Bank for International Settlements (Sirio Aramonte, Sebastian Doerr, Wenqian Huang and Andreas Schrimpf), 14 June 2022.
Liquidity Pool (Aave V3 concepts). Aave Protocol Documentation, page read 24 October 2026.
Interest Rates (Compound III docs). Compound III documentation, page read 24 October 2026.
Borrow Interest Rate (Aave risk documentation). Aave, aave/risk-v3 repository on GitHub, last edited 9 October 2023; read 24 October 2026.
Reserve (Aave V3 concepts). Aave Protocol Documentation, page read 24 October 2026.
Risk Parameters (Aave risk documentation). Aave, aave/risk-v3 repository on GitHub, last edited 9 September 2023; read 24 October 2026.
Health Factor & Liquidations. Aave (Aave Help), page read 24 October 2026.
Liquidation (Compound III docs). Compound III documentation, page read 24 October 2026.
Comptroller (Compound v2 docs). Compound v2 documentation, page read 24 October 2026.
Aave V4's New Liquidation Engine. Aave (blog), 11 December 2025.
The Financial Stability Risks of Decentralised Finance. Financial Stability Board, 16 February 2023.
Risks. Aave Protocol Documentation, page read 24 October 2026.
Umbrella. Aave Protocol Documentation, page read 24 October 2026.