Protocols lend your USDC to traders who borrow against crypto collateral at 12-15% rates. The 4-7% spread goes to: protocol fees (1%), insurance (1%), defaults (1-2%), and your yield (3-5%). More defaults = lower your yield.
1) Borrower defaults (collateral worth less than loan). 2) Protocol hack or exploit (rare, but ₹5,000 crore lost in Nomad Bridge). 3) Bank run—if 50% of lenders withdraw at once, protocols may pause withdrawals to prevent contagion.
Aave: Most audited, ₹50,000+ crore TVL, insurance via Nexus Mutual. Curve: Stable-asset specialist, lower default risk. Yearn: Higher yields but more complex (delegates to multiple protocols). For ₹20+ lakhs: Aave first, then Curve, then Yearn.
When Silicon Valley Bank failed in March 2023, crypto lending platforms froze deposits for days. Curve and Yearn paused withdrawals. Aave held but saw 10% outflows. Your ₹50 lakhs became inaccessible for 48 hours. Even best protocols can't survive systemic crashes.
Split ₹50 lakhs: ₹25 to Aave, ₹15 to Curve, ₹10 to Yearn. Never put your entire portfolio in one protocol. Buy insurance on Nexus Mutual for ₹500+ positions (costs 0.5% APY). Monitor governance votes—protocol changes signal risk.
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