# How unflat Earns Higher Rates

Why DeFi lending can offer up to 6x what a traditional European bank pays.

## The problem with traditional banks

Traditional banks pay you very little interest, typically 0.5 to 1.5% in Europe, because they keep most of the spread between lending and deposit rates. Multiple layers of intermediaries each take a cut before anything reaches you.

## The DeFi lending alternative

DeFi lending protocols like Morpho are autonomous software that matches lenders and borrowers directly. The rules are written in code (smart contracts) and execute automatically. No bank sits in the middle taking a cut.

This is why the yields are higher: when you remove intermediaries, the margin that would have gone to banks goes to you instead.

## Why borrowers pay higher rates

Borrowers use these markets for practical reasons:

* **Leverage without selling:** Access liquidity without selling appreciated crypto assets
* **Tax efficiency:** Borrow instead of triggering a taxable sale event
* **Arbitrage:** Exploit price differences across venues
* **Capital efficiency:** Use idle assets productively

They're willing to pay competitive interest rates for this convenience. When borrowing demand is high, rates go up. When it cools, rates decrease.

## Why lenders (you) are protected

Every loan is overcollateralized. A borrower must lock up assets worth significantly more than what they borrow (e.g., €15,000 in ETH to borrow €10,000). If the collateral value drops below a safety threshold, the smart contract automatically liquidates it to repay lenders.

The borrower assumes the risk, not you.

## unflat vs. Traditional Banks

|                        | unflat                     | Traditional Bank      |
| ---------------------- | -------------------------- | --------------------- |
| **APY**                | Up to \~7% (variable)      | 0.5 to 1.5%           |
| **Lockup**             | None                       | Often required        |
| **Interest frequency** | Every second               | Monthly / quarterly   |
| **Transparency**       | On-chain, verifiable       | Opaque                |
| **Deposit insurance**  | No                         | Yes (€100K)           |
| **Middlemen**          | None (code)                | Multiple layers       |
| **Custody**            | Non-custodial (you own it) | Bank holds your funds |

{% hint style="warning" %}
**Rates are variable.** APY depends on supply and demand. When borrowing demand is high, rates go up. When it's low, rates decrease. unflat does not guarantee any specific return.
{% endhint %}

## A note on the trade-off

Higher returns come with different risk profiles. Traditional banks offer deposit insurance (up to €100,000 in the EU) but very low yields. unflat offers higher yields but without government-backed insurance. Both have a place in a balanced financial strategy. We encourage you to understand the differences before depositing.


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