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How Do Lending Protocols Utilize ERC-20 Standards for Collateral?

Protocols use the standardized approve and transferFrom functions to lock and potentially seize ERC-20 collateral upon liquidation.
Greeks.Live16.11.25

How Do Lending Protocols Utilize ERC-20 Standards for Collateral?

Lending protocols rely on the standardized transferFrom and approve functions of ERC-20. Users approve the lending contract to access their collateral tokens.

When a loan is issued, the contract locks the collateral. If the loan is liquidated, the contract uses transferFrom to seize and sell the collateral.

The standard ensures the protocol can interact reliably with any approved ERC-20 token.

How Does the Nonreentrant Modifier Implement the CEI Principle?
Why Was the Approve() and Transferfrom() Pattern Chosen for the ERC-20 Standard?
Why Is a Two-Step Approve and Transferfrom Process Often Cheaper in the Long Run for Frequent Interactions?
What Is the Transferfrom() Function and How Does It Relate to Approve() ?

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