> ## Documentation Index
> Fetch the complete documentation index at: https://docs.theblockchainlibrary.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Money Market

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

# 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.

## Related knowledge

* [Smart Contract](/generated/v2/glossary/smart-contract) — term

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**Canonical knowledge ID:** `glossary:money-market`