The world of decentralized finance (DeFi) is just beginning to explore the art of the possible. Users can earn interest on their digital crypto assets or borrow against them. DeFi lending protocols lie at the heart of this ecosystem. Taken together they provide the building blocks that will enable anyone in the world to lend and borrow digital assets in a free, open permissionless environment. ThrowingToken.com aims to provide an expert insight into four prominent players in this space: AAVE, Kamino, Morpho, and Sky. Each protocol has its own characteristics, strengths, and weaknesses that appeal to varied user profiles and risk appetites. This article provides a side-by-side comparison to ensure that you’re ready to make informed decisions about which platform fits your specific needs best.

By January 2025, Total Value Locked (TVL) across DeFi protocols is over $128.6 billion. This figure highlights both the explosive growth and adoption of DeFi lending. Aave holds an impressive $23.5 billion TVL alone, across various chains, showing that it is king of the market at the moment. The current Total Value Locked (TVL) has plummeted from its top of $78 billion in April 2022. Simultaneously, the DeFi landscape is relatively nascent, offering cutting-edge solutions and unprecedented opportunities to users. As of today, there’s roughly $40 billion trapped in crypto within DeFi. Along with AAVE, MakerDAO is currently one of the most popular and profitable decentralized applications. They each have $4.9 billion and $7.9 billion locked in crypto right now.

Understanding DeFi Lending Protocols

DeFi lending protocols are built on blockchain-based smart contracts, which function without traditional intermediaries. These decentralized smart contracts enable individuals to lend their digital assets directly to each other, and users can connect directly to the lending protocol. Crypto wallets and DeFi lending protocols, like Metamask, Gnosis Safe, and Argent, place users fully in control. Second, they empower people to be the exclusive keepers of their crypto holdings. By providing access to DeFi lending, users have greater control over their funds. Its decentralized and non-custodial nature reduces centralized failure risk. Users can lend or borrow in minutes—often at more attractive rates—and participate in permissionless and censorship-resistant protocols via blockchain-based smart contracts.

Key Features of DeFi Lending

  • Decentralized and non-custodial: Users maintain control over their assets through crypto wallets.
  • Smart contract-based: Lending and borrowing are facilitated by automated smart contracts.
  • Collateralization: Borrowers must provide cryptocurrency collateral to secure their loans.

To take out a loan in DeFi, borrowers must deposit their own cryptocurrency tokens to use as collateral. This collateral usually has to be in tokens valued at 1.5x to 3x the loan amount. Users can select which money market to lend to with blockchain-based smart contracts. This makes it possible for them to earn interest pegged to the market’s prevailing annual percentage yield (or APY). Collectively, these features make it a more transparent lending and borrowing environment. They increase productivity and inclusion, creating an experience that is infinitely better than any legacy financial service.

AAVE: The Money Market Giant

AAVE is a decentralized lending protocol, and it functions on a money-market based model. Lenders increase their yields by depositing crypto assets into AAVE’s liquidity pools. Simultaneously, borrowers are finding loans by pledging collateralized assets. AAVE offers variable and stable interest rates, flash loans, and collateral swapping, providing users with a range of options to manage their positions. AAVE provides a similar experience on the lending side for annualized interest rates over 5% using a money-market style of lending.

AAVE’s biggest strength is the large number of assets it supports and an overall established reputation within the DeFi community. The platform features a Health Factor Distribution indicator. It’s useful for borrowers and depositors alike, so they can understand their risk exposure and manage it appropriately. The APY on deposits in DeFi have been high by design, frequently >5% annualized. Yearn’s launch in Summer 2020 created a rapid stir across the DeFi space. The extreme yield on Dai and USDC in Yearn drove deposits APYs on Aave and Compound to all-time highs. DeFi protocols are still furiously playing off one another. It allows participants to borrow on-chain to take part in cross-asset basis trading and often exposes them to interest rates over 30% in crypto.

Kamino: Concentrated Liquidity Optimizer

Kamino is primarily focused on making liquidity provision the best possible experience in the DeFi ecosystem. Kamino’s lending mechanisms are still murky. That’s because its central purpose is greater economic efficiency through improved capital allocation. This almost inevitably means improved yields for lenders and more competitive rates for borrowers on-platform.

Where Kamino truly shines is in its innovative approach to liquidity management. It has the opportunity to produce far greater return on investments for its participants. By providing greater optimization for liquidity, Kamino is able to minimize slippage, allowing traders to have the best experience possible when moving within the DeFi ecosystem.

Morpho: The Peer-to-Peer Optimizer

Morpho acts as an optimizer layer on top of existing lending protocols like Aave and Compound. It aggregates demand and supply of liquidity and matches lenders and borrowers peer-to-peer delivering higher effective rates than going directly to the underlying protocols. Morpho aims to provide users with the best of both worlds: the security and stability of established protocols with the efficiency of peer-to-peer lending.

Since then, Morpho has proven itself at increasing returns for lenders and borrowers alike. Best of all, they don’t have to move their assets to a different platform. You can still enter the DeFi lending space, simply and efficiently — thanks to Morpho making the best out of the current existing infrastructure.

Sky: The Innovative Challenger

With so little publicly available information on Sky, producing a full apples-to-apples comparison is difficult. Its inclusion in this analysis suggests that it is an emerging player in the DeFi lending space with potentially innovative features.

Absent more detail, it’s hard to tell what Sky’s strengths and weaknesses will be. Its presence in the DeFi landscape remains significant. Watch for it to continue to grow and change as it matures and incubates.

Choosing the Right Platform

Choosing the best DeFi lending platform will come down to your own needs and level of risk tolerance.

  • AAVE: A solid choice for users seeking a well-established and diversified platform with a wide range of supported assets.
  • Kamino: Best suited for users looking to maximize their returns through optimized liquidity provision.
  • Morpho: Ideal for users who want to enhance their existing lending and borrowing positions on Aave or Compound without migrating their assets.
  • Sky: Requires further research to determine its suitability for specific user profiles.

Before participating in any DeFi lending protocol, it's recommended to conduct thorough research on the protocol's background, team, security audits, and community reputation.

DeFi lending protocols offer a compelling alternative to traditional financial systems, providing users with greater control, transparency, and potential for higher returns. By understanding the unique characteristics of each platform, users can make informed decisions and navigate the DeFi landscape with confidence.