How Solana DeFi lending works: supply, collateral and debt

The pool connects suppliers and borrowers

A lending pool collects an asset from suppliers and makes eligible borrowing available through its program. It records available funds, outstanding debt and claims on the pool. Suppliers do not normally choose an individual borrower for each deposit.

Choose a teaching reserve with 1,000 USDC supplied and 700 USDC borrowed. The remaining 300 USDC is available under the simplified model before other requirements. Utilisation is 700 divided by 1,000, or 70%.

Borrowers pay for using the funds. Under a chosen simple-interest illustration with a constant 10% annual borrow rate on the 700 and no other effects, that debt produces 70 USDC of annual interest. Relative to all 1,000 supplied, this is 7% gross before fees. The example explains dilution by unused capital, not a current product APY.

Real rates and balances vary. A reserve's curve and program accounting determine the actual income. Keep displayed incentives separate unless the definition includes them.

Supplying creates a position rather than a personal vault

When you supply USDC, the program records your claim using its position structure. A product can use receipt tokens or position accounts. Read what you hold and how it converts back to the underlying asset.

Kamino's supplying documentation, for example, describes kToken claims and their conversion accounting. The quantity of a receipt and the quantity of underlying assets can differ. Income may appear through a changed exchange value rather than more receipt units in a wallet.

The supplied tokens join the pool's working capital. They are not all waiting in a separate account reserved exclusively for your withdrawal. Available liquidity and any position obligations therefore matter to exit.

If the deposit is also used as collateral, withdrawing it can reduce borrowing capacity. The program checks the remaining position rather than treating the withdrawal as unrelated to the loan.

Collateral makes a loan enforceable through program rules

Suppose Alice supplies 10 SOL as eligible collateral. At a chosen valuation of 100 currency units per SOL, the collateral is worth 1,000. She borrows 400 USDC valued at one unit each in this teaching calculation.

The simple debt-to-collateral ratio is 40%. The actual protocol applies its asset factors and position mode before deciding borrowing capacity and liquidation eligibility. An interface's maximum borrow amount comes from those rules.

Alice now has two economic sides: collateral locked into the position and a 400-USDC debt, plus the borrowed asset she received. The loan did not create a profit of 400. It created funds she can use and an obligation to repay.

The assets she chooses matter. A debt denominated in SOL behaves differently from a debt denominated in USDC when market prices change. Compare obligations in their actual asset units.

Follow both sides of a collateralized loan

Interest and prices change the position over time

Interest can increase debt without another wallet action. If Alice's debt grows while collateral value stays fixed, the ratio rises. If SOL's price falls, the collateral value can shrink at the same time.

Borrow rates often depend on utilisation through a configured curve. Higher demand for a limited reserve can change the rate. A percentage seen at opening is not necessarily fixed for the full holding period.

Oracle data supplies the valuation inputs under the protocol's chosen path. The price consumed by the program, its timestamp and risk adjustments matter to the health calculation. A price from an unrelated website is a different observation.

The LTV guide works the ratios numerically, and the oracle guide explains how valuation data enters the program.

Follow price, interest, repayment and withdrawal in one position

Return to the teaching loan backed by 10 SOL. The starting valuation is 100 per SOL, with 400 USDC of debt. Now suppose SOL's valuation falls to 80 and interest has increased the debt to 412. Collateral value becomes 800, and simple LTV rises to 412 / 800 = 51.5%.

A repayment of 112 USDC reduces debt to 300 while collateral remains 800, giving 37.5% LTV. If the borrower then withdraws two SOL, collateral falls to eight SOL × 80 = 640. LTV rises again to 300 / 640 = 46.875%.

The repayment improved that simple ratio, while the later withdrawal used part of the resulting margin. This calculation does not establish that any of those actions passes a particular market's health rule. A real market can apply weights, caps, isolation rules, oracle conditions and liquidity constraints in addition to the simple ratio.

Review the actual resulting position before signing each action. A preview of repayment alone does not describe the state after a combined repayment-and-withdrawal operation. Use the current debt amount and required repayment asset; an original principal figure can leave a residual obligation.

For a complete exit, distinguish paying the debt, releasing collateral and withdrawing supplied assets. A zero debt balance removes one constraint but does not create reserve liquidity that other borrowers still use. The withdrawal guide follows that last step.

Liquidation reduces eligible debt using collateral

When a position breaches its defined condition, the program can permit a liquidator to repay some debt and receive collateral under configured terms. This is an operation on the position, not a notification asking the borrower to approve first.

The allowed repayment fraction and compensation affect the amount removed. They can vary by market, mode and severity. After one operation, the position may be healthy or still eligible for another.

Sharp price movement, limited sale depth or unavailable participants can impair recovery. Overcollateralised at loan opening does not guarantee that every later state remains fully covered. Read the market's loss-handling mechanism as part of the actual product.

The liquidation guide demonstrates a complete chosen-parameter operation and the resulting balances.

Repay and withdraw in the correct order

Identify the current amount owed and the asset required for repayment. Accrued interest can make it larger than the original borrowed amount. A supported full-repayment action should account for the current program state.

If you do not hold the debt asset, obtaining it can require a market operation. Some products support repaying with collateral through a composed swap-and-repayment action. That route has its own quote, costs and health checks.

After repayment, verify the remaining debt and collateral. Withdraw the eligible amount through the supported flow and inspect actual receipt. A supplier without debt still needs the reserve's available withdrawal liquidity.

Keep opening, borrowing, interest observations, repayments and withdrawals in a position ledger. That sequence explains the financial result much better than comparing one wallet balance before entry and another after exit.

Common questions