DeFi lending and borrowing: What is and how to earn yields from it in 2025
As of September 2025, according to DefiLlama, the DeFi lending and borrowing market has a Total Value Lock (TVL) of $131,595 billion dollars. This represents the stored liquidity, the assets deposited as debt collateral, and the outstanding loans in the dApps of this sector.
Understanding how this decentralized finance system works can help you optimize the use of your savings and take advantage of attractive investment returns (ROI) between 3% and 9% in 90-day periods, which translates into APY between 12.78% and 43.94%.
In addition, if you act as a user who applies for a loan, you could access lower interest rates compared to some in the traditional market. We are talking about borrow rates between 3% and 10%.
Below we explain in a simple way how this system works, where the yields come from, and what you should pay attention to in order to choose the specific protocol where you will carry out your own operations.
What is DeFi lending & borrowing
It is a financial loan market that works on blockchain technology and, as a result, has a series of unique qualities based on process automation and data transparency.
Although one of its main purposes is the elimination of human intermediaries that generate unnecessary costs, there currently exists a wide market of platforms in this sector offering DeFi loan services, which in turn, through the configuration of smart contracts, charge fees.
Even so, it is a significantly more efficient and fairer market for individual and institutional users globally, compared to opportunities in the traditional market characterized by bureaucratic and friction-filled processes.
It is important to highlight that this market is directly influenced by the dynamics of the cryptocurrency market, since loans are made through the management of these digital assets.
A simple and friendly way to start interacting with DeFi loan platforms is through the use of stablecoins (e.g. USDC) and consolidated cryptocurrencies such as Bitcoin ($BTC) or Solana ($SOL).
How DeFi loans and borrowings work
When you enter DeFi lending, you will find two main models: Peer-to-Pool (P2Pool) and Peer-to-Peer (P2P). Both aim to connect lenders with borrowers, but the way they handle risk, flexibility, and yields may differ.
Lenders deposit assets in a liquidity pool or “lending pools.” From there, borrowers can take loans, and the pool dynamically adjusts interest rates according to supply and demand.
High demand for loans? ➝ Rates go up, making it more profitable for the lender.
Low demand? ➝ Rates go down.
The utilization rate (funds used ÷ available), the Loan-to-Value (LTV) and the value of the collateral play a key role in determining the yields and costs of loans.
Some protocols offer extra incentives, such as distributing governance tokens. They may represent potential earnings, but they are not the real base of your profits.
It is also common to see pools that lend a single asset (like USDC) while accepting multiple collaterals (ETH, SOL, BTC, etc.) from borrowers. This opens up more opportunities for lenders to diversify and capture yields from different players in the market.
The lender’s path
- Connect your wallet to the protocol.
- Choose how to lend:
- Deposit your assets and let the market do its work.
- Start earning yields that fluctuate depending on loan demand.
The borrower’s path
- Connect your wallet to the protocol.
- Select an offer or pool that fits your needs (available assets, allowed LTV, repayment terms).
- Provide collateral, your guarantee that you will repay (e.g., $RECC).
- Receive the funds directly on-chain, everything traceable and transparent.
- Use the borrowed funds according to your strategy, either for optimization or as liquidity assets.
- Repay the loan under the agreed terms and recover your collateral.
Asset price changes (loan and/or collateral)
Here are some possible scenarios when operating DeFi loans:
| Parameter changes | Possible actions and effects (depending on smart contract terms and conditions) |
|---|---|
| Collateral price rises ↑ | The borrower can withdraw part of the collateral or request more loan while maintaining the target LTV. |
| Collateral price drops ↓ | The borrower can add more collateral or amortize part of the debt to avoid reaching the liquidation ratio. |
| Loaned asset price rises ↑ | The real cost of the debt (in the borrower’s accounting unit) may increase; borrower’s usually amortize earlier if the APR rises or if the risk doesn’t compensate. |
| Loaned asset price drops ↓ | The value repaid is “cheaper”; the lender may end up recovering less real value; lenders should review risk parameters for future operations. |
| Pool utilization rises / rates go up ↑ | APY improves for lenders; borrowers pay more (APR↑). |
| Pool utilization drops / rates go down ↓ | APY decreases for lenders; borrowers pay less (APR↓). |
| High collateral volatility | Adjust LTV to a prudent level (e.g., 40–60% in volatile assets) to avoid forced liquidations. |
| Sharp price event (gap) | Partial/inefficient liquidation may occur if the market moves faster than the bots; mitigate with liquid collaterals and conservative LTV. |
Suppose a borrower asks for 1,000 USDC leaving 1 ETH as collateral when ETH is worth 2,500 USDC. This means an LTV of 40%, a healthy level because it leaves a good safety margin for the lender and less liquidation risk for the borrower.
Loan-to-Value (LTV) = (Loan amount / Collateral value) × 100
If the value of ETH rises and the protocol allows it, the borrower could request a larger loan or withdraw part of the collateral; if it falls near to 1,000 USDC value (means -60% of ETH price in the market), they would have to add more collateral or repay the loan before liquidation.
It is also important to understand that if a borrower decides to repay a loan early, both the interest generated and the lender’s yields are calculated only for the real period in which the loan lasted.
How to earn passive income with DeFi lending?
The first thing is to review your wallet, if you have stablecoins like USDC or DAI sitting idle you can put them to work in a lending pool and start earning APY.
On the other hand, if you need liquidity but don’t want to sell your crypto, then the ideal option is to request a loan against that asset.
Perspective Lender
Look for audited protocols, with good reputation in the community, and set moderate expectations to start. You can aim for a 3–8% stable APY or 9–15% if you take advantage of incentives, and then move on to more fruitful returns of 20–40% APY.
Also, in the P2P market, you can test with personalized short-term periods (7 days) to get the first hands-on experience with the operations.
Perspective Borrower
Be clear on what you will use those funds for. Many request USDC against ETH to avoid selling their ETH while still having liquidity. Others do it for more advanced yield strategies, based on market analysis.
With RECC + Rain.fi you can combine real estate investment with optimization in asset management through DeFi loans.
“You might also be interested in How to start investing in Real Estate through Crypto”
Advantages over the traditional loan market
One of the biggest advantages of DeFi lending is speed. Transactions are executed on-chain in minutes, no paperwork, no waiting weeks for approvals.
You also get global access. Whether you’re in Mexico, Spain, or Singapore, all you need is a wallet and internet connection to borrow or lend. No borders, no local bank restrictions.
Unlike banks, DeFi doesn’t require personal identification. You keep your privacy, operating under full anonymity while still having verifiable transactions recorded on-chain.
Costs are lower, too. Without intermediaries, lenders earn higher yields and borrowers face lower fees compared to the spreads and commissions in traditional finance.
You can repay loans early, extend them, or even re-collateralize depending on how the market moves. This level of autonomy and flexibility simply doesn’t exist in the old system.
DeFi protocols are also interoperable. Many already work across multiple blockchains, letting you move capital, collateral, and strategies seamlessly between ecosystems.
Finally, customization plays a key role. You’re not locked into fixed bank products, you choose APY, collateral type, LTV, and even risk level according to your own strategy.
FAQS
What happens if you don’t pay back a DeFi loan?
The protocol will automatically liquidate your collateral in the secondary market to cover the debt. That’s why Loan-to-Value (LTV) ratios are usually set below 80%, in order to protect lenders and ensure the loaned amount can be recovered even if the asset loses value.
What does collateralization mean in DeFi?
It means locking an asset as collateral in order to receive a loan. This collateral backs the debt and assures the lender that their money is protected. For example, you could use tokens like $RPST to access liquidity in USDC without having to sell your original position.
Conclusion
Lending and borrowing in DeFi opens a powerful path for those who want to make their financial assets profitable with attractive APYs or access liquidity without selling. Understanding concepts like LTV, variable rates, and the role of collateral is key to making smart decisions.
If you want to take it a step further, projects like RECC show how these tools can be combined with real opportunities in the real estate market, building a bridge between decentralized finance and tangible economy.
