In decentralized lending protocols, lenders and borrowers interact directly with each other through a smart contract.
In order to mitigate risk, borrowers supply a collateral for their loans with a value higher than their loan amount.
In pool based money markets, all liquidity is pooled in a smart contract that borrowers take loans from:
- Borrowers deposit Ether and/or other ERC20 tokens to the money market as collateral
- Borrowers take a variable interest loan from the pool of liquidity.
- Lenders(rDAI users, for example) provide liquidity to the pool
- The interest rate paid by the borrowers is credited to the lenders
- The rate is variable and reflects the market, depending on demand for loans and availability of liquidity