Skip to main content

​
Money Market

A protocol or market for supplying and borrowing liquid digital assets.

​
Definition

A protocol or market for supplying and borrowing liquid digital assets.

​
Why it matters

DeFi concepts explain blockchain-based markets, lending, trading, liquidity, and financial automation.

​
How it works

Lenders deposit funds into a smart contract and receive interest-bearing tokens. Borrowers deposit collateral in a different asset to withdraw funds from the pool. If a borrower’s collateral value drops, the protocol automatically liquidates it to repay lenders, maintaining system solvency.

​
Real-world example

Aave and Compound are the leading decentralized money markets where users earn yield or take out loans.

​
Advantages

  • Earn interest on idle assets
  • Borrow funds without selling crypto
  • Automated and transparent interest rates

​
Limitations

  • Risk of protocol liquidation
  • Smart contract exploit risks
  • Interest rate volatility

​
Common misconceptions

  • Many think these function like traditional bank deposits. Deposits are not insured and carry the risk of the underlying protocol failing.
  • People often believe collateral isn’t needed. All borrowing in DeFi requires over-collateralization to protect the lenders.
Canonical knowledge ID: glossary:money-market