This content is for educational purposes only and does not constitute financial advice. Always do your own research before making any lending or borrowing decisions.

The Radix DeFi ecosystem features robust lending and borrowing infrastructure through platforms such as Root Finance or WEFT. These protocols create money markets where users can earn yield on idle assets or access liquidity without selling their holdings.

Many DeFi activities on Radix such as borrowing and lending currently earn points through the Radix Rewards Campaign. To see which activities are eligible, visit the dashboard.

How DeFi Lending Works

DeFi lending describes a marketplace where lenders meet borrowers.  The smart contract automatically manages deposits, withdrawals, interest, and collateralized loans without intermediaries. When you lend assets on Root or WEFT, you're providing liquidity to a pool that other users can borrow from. Interest rates adjust dynamically based on supply and demand, creating efficient markets that find their own equilibrium.

Both platforms support core Radix ecosystem assets such as: 

• XRD
• hUSDC
• hUSDT
• hETH
• hWBTC
• LSULP 

‍

When you lend, you receive receipt tokens representing your position in the form of Root Receipt NFTs on Root Finance or w2-tokens (w2-XRD, w2-hUSDC) on WEFT. These automatically increase in value as borrowers pay interest into the pool. 

For example, if you deposit 100 hUSDC, you may get 100 w2-hUSDC back. Your wallet will always show 100 w2-hUSDC, but when you claim it, you will get the 100 hUSDC back plus any interest. No manual claiming or compounding is required.

The Borrowing Mechanism

DeFi borrowing operates through overcollateralization. You must deposit more value than you borrow, typically accessing only 60-80% of your collateral value. This protects lenders while giving you liquidity without selling assets.

Key metrics include:

• Health Factor: Platforms display this differently - WEFT uses a scale where below 1.0 is safe and above 1.0 triggers liquidation, while Root shows "Borrow Power Used" as a percentage. The closer you get to the liquidation threshold, the riskier your position becomes.
• Loan to Value Ratio (LTV): The maximum you can borrow against your collateral varies by platform and asset pair - typically ranging from 50% on some WEFT pairs to around 65% on Root for many tokens.
• Liquidation Penalty: When liquidation occurs, you lose additional collateral as a penalty - currently around 8% on Root and 12% on WEFT. 
• Risk Management: Your safety depends on market conditions and position size. Lower utilization of your borrowing capacity provides more buffer against market volatility.

‍

The key benefit of DeFi borrowing lies in capital efficiency. You can deposit hWBTC, borrow hUSDT for immediate needs, and potentially benefit if hWBTC appreciates. However, if hWBTC decreases in price, your position moves closer to liquidation unless you repay some debt or add more collateral. 

Your collateral continues working while you access liquidity, but this leverage amplifies both gains and losses.

Interest Rate Dynamics

As more funds are borrowed and utilization rises, interest rates gradually increase. This encourages borrowers to repay and attracts more lenders to supply liquidity. When utilization is lower, rates decrease, making borrowing more appealing. The system naturally balances itself based on market activity.

Strategic Use of Borrowed Capital

Borrowed assets can be used to gain access to powerful DeFi strategies. You can borrow stablecoins against hWBTC collateral to trade on DEX pairs like hUSDC:XRD, maintaining your hWBTC position while actively trading. Or combine borrowed assets with owned tokens to provide liquidity, earning trading fees that offset borrowing costs.

Looping strategies can amplify positions significantly. By recursively borrowing and redepositing, you achieve leveraged exposure to yields or assets. For a deep dive into looping on Radix, see this dedicated article. 

Most importantly, borrowing enables cross-protocol capital efficiency. You can maintain exposure through lending while deploying borrowed stablecoins across the ecosystem.

Understanding the Risks

Liquidation is the primary concern while borrowing. When your health factor drops below 1.0, liquidators can claim your collateral plus a penalty. Markets can move quickly potentially resulting in cascading liquidations that amplify losses during volatility.

Best practices: 

• Monitor your positions regularly
• Set price alerts for assets used as collateral
• Maintain repayment reserves 
• Start small and scale gradually as you gain a deeper understanding of the mechanics involved

‍

High utilization can also create temporary withdrawal delays when many users exit simultaneously meaning lenders are unable to withdraw all their assets. 

The Lender's Perspective

Lenders earn yield from borrowers interest payments, but they also share in the protocol's risks. While utilization spikes can boost returns, they may temporarily limit withdrawals if most liquidity is actively lent out, although this has rarely occurred in practice. 

The greater concern is bad debt, which can arise if a large borrower’s position isn’t liquidated in time, leaving unrecovered losses. Both scenarios are uncommon but important to understand, as they highlight how lender returns are closely tied to overall market activity and protocol performance.

Managing Positions

Withdrawing from lending positions is straightforward. You redeem receipt tokens for the original assets plus earned interest. Since receipt tokens continuously appreciate, you'll normally receive more than your initial deposit assuming no protocol losses or bad debt situations. Just be aware that high utilization might temporarily limit withdrawals when most capital is actively borrowed.

To close a borrowed position, borrowers must repay the assets they owe, which may involve acquiring tokens or unwinding other positions. The system allows partial repayments, giving borrowers flexibility to reduce exposure over time as their strategy or market conditions change. Repayment timing can influence outcomes as asset prices and liquidity vary with market activity.

Conclusion

Lending and borrowing on Root and WEFT are a great next stop on your DeFi journey. These protocols enable efficient capital markets through automated interest accrual, dynamic rates, and composable positions.

Success requires understanding both mechanics and risks. Start conservatively to understand the dynamics and scale gradually with experience. 

To start earning Radix Reward points for lending, borrowing, and other DeFi activities on Radix, visit incentives.radixdlt.com/dashboard/earn.