Let's start with what lending and borrowing is.
Lending and borrowing is one of the most important element of any financial system. Most people at some point in their life are exposed to borrowing, usually by taking a student loan, a car loan or a mortgage.
The whole concept is quite simple. Lenders a.k.a. depositors provide funds to borrowers in return for interest on their deposit. Borrowers or loan takers are willing to pay interest on the amount they borrowed in exchange for having a lump sum of money available immediately.
Traditionally, lending and borrowing is facilitated by a financial institution such as a bank or a peer-to-peer lender.
In the cryptocurrency space, lending and borrowing is accessible either through DeFi protocols such as Aave or Compound or by CeFi companies, for instance, BlockFi or Celsius.
CeFi or centralized finance operates in a very similar way to how banks operate. This is also why sometimes we call these companies "crypto banks". BlockFi, for example, takes custody over deposited assets and lends them out to either institutional players such as market makers or hedge funds or to the other users of their platform.
Although the centralized lending model works just fine, it is susceptible to the same problems as centralized crypto exchanges—mainly losing customer deposits by either being hacked or other forms of negligence.