Your First Lending Position: A Worked Example

Every concept from this module — supply and borrow rates, collateral ratios, liquidation thresholds, health factors, and stablecoin backing — comes together in this lesson as you walk through a complete lending cycle from deposit to withdrawal. As with your first swap and your first liquidity deposit in earlier modules, the goal is to do this deliberately, recording real numbers rather than reading about it abstractly.

The full cycle has five stages. Stage one: deposit an asset purely to earn interest, with no borrowing — this is the simplest possible entry point into lending, and it's worth doing on its own first before adding the complexity of borrowing against collateral. Stage two, if you choose to go further: deposit a second asset specifically as collateral and borrow a different asset against it, checking the resulting LTV against the protocol's max LTV and liquidation threshold from the collateral-ratios lesson before confirming anything. Stage three: monitor your position's health factor on an ongoing basis, exactly as the liquidation-risk lesson recommended, rather than depositing and forgetting about it. Stage four: if the health factor approaches a level you're uncomfortable with, either repay part of the borrowed amount or add more collateral — put the "pre-decided action plan" from the previous lesson into practice rather than deciding under pressure. Stage five: when you're ready, repay any outstanding loan in full and withdraw both your collateral and your original interest-earning deposit, closing the position cleanly.

Doing all five stages with a testnet or a small real position, and writing down the actual APY earned, the actual LTV reached, and the actual health factor observed, turns the lending mechanics from this entire module into a concrete reference point — exactly the kind of real data your Module 7 capstone project will ask you to document.

Worked Example

Start with the simple case: you deposit 1,000 USDC into a lending pool showing a 4% supply APY, with no borrowing. After one week, your position has earned a small amount of interest, continuously accrued rather than paid out in a lump sum — checking the dashboard, your deposit balance shows slightly more than 1,000 USDC, reflecting roughly one week's worth of that 4% annualized rate. This is the lowest-risk way to experience lending mechanics: there's no collateral ratio to monitor and no liquidation risk at all, because you haven't borrowed anything.

Now extend the example: a week later, you decide to also deposit 0.5 ETH, worth $1,500 at the time, as collateral, and borrow 300 USDC against it. Checking the protocol's dashboard, your LTV is 300 ÷ 1,500 = 20% — far below the hypothetical 80% max LTV and 85% liquidation threshold from the previous two lessons, giving you a large safety buffer by design, consistent with the conservative-borrowing recommendation from the liquidation-risk lesson. You check the dashboard's health factor indicator weekly rather than constantly, and because your LTV is so conservative, even a 20-30% drop in ETH's price would leave you well short of the liquidation threshold. After a month, you decide to close the position: you repay the 300 USDC borrowed (plus a small amount of accrued borrow interest), and withdraw both your 0.5 ETH collateral and your original 1,000 USDC deposit plus its accrued supply interest.

It's worth reflecting on why this worked example deliberately chose such a conservative 20% LTV rather than borrowing closer to the protocol's maximum. Borrowing near the maximum LTV maximizes capital efficiency — you extract the most borrowing power from your collateral — but it also minimizes your buffer against price moves, meaning a comparatively small decline in your collateral's value could push you toward liquidation. The conservative approach demonstrated here trades some capital efficiency for a much larger safety margin, which is the appropriate choice for a first real lending position, and generally the appropriate default for any position where the cost of being wrong (a forced liquidation, with its associated penalty) outweighs the benefit of squeezing out slightly more borrowing capacity.

Common Pitfalls

• Borrowing at or near the maximum LTV on a first position. Save aggressive borrowing for after you've built real experience monitoring health factors under live market conditions.
• Forgetting that both the supply side and the borrow side accrue interest continuously. Your deposit balance and your owed balance both change slightly every block, not just at fixed intervals — check current balances rather than assuming they match your last visit.
• Closing a position without first checking for any accrued borrow interest owed. Attempting to repay only the original borrowed amount, without the small accrued interest on top, will leave a residual balance rather than fully closing the position.

Exercise

Using a testnet if one is available to you, or a very small real deposit if you're comfortable with it, supply a single asset to a lending protocol and record the exact supply APY shown and the exact amount earned after at least a few days of holding the position.

If you're comfortable going further, deposit a second asset as collateral and borrow a small amount against it at a conservative LTV — well under the protocol's maximum, following the buffer logic from the liquidation-risk lesson. Record your exact LTV and health factor at the moment you borrow. Document all of these figures — the supply APY, interest earned, LTV, and health factor — in writing, because the Module 7 capstone project specifically asks you to justify a lending position (if you choose one) using real numbers like these rather than hypothetical ones.

Recap

• A full lending cycle has five stages: deposit to earn, optionally borrow against added collateral, monitor your health factor, act if it degrades, and repay/withdraw to close cleanly.
• Starting with deposit-only lending (no borrowing) is the lowest-risk way to learn the mechanics before adding collateral and liquidation risk.
• The real APY, LTV, and health factor numbers from your own position become documented evidence you'll reuse to justify your Module 7 capstone strategy.

Resources

• Aave Protocol FAQ
• Etherscan — Blockchain Explorer