Crypto lending lets you borrow cash or stablecoins by pledging cryptocurrency as collateral, or earn interest by lending your digital assets to others through centralized or decentralized platforms. It's one of the most direct ways to put idle crypto to work or access liquidity without selling.
This guide covers how crypto lending actually works, the differences between CeFi and DeFi platforms, the risks that have caused major failures, and how to evaluate whether it fits your situation.
This content is for educational purposes only and should not be considered financial advice. Crypto lending carries significant risks, including loss of capital, price volatility, smart contract vulnerabilities, platform insolvency, and regulatory uncertainty. Always do your own research before participating.
Crypto lending is a way to borrow money using cryptocurrency as collateral, or to earn interest by lending your digital assets to others. Borrowers deposit crypto (like BTC or ETH) and receive stablecoins or fiat in return. Lenders deposit idle assets into a pool and earn yield as those assets get borrowed. Stablecoins or fiat in return. Lenders deposit idle assets into a pool and earn yield as those assets get borrowed.
The whole process skips traditional credit checks entirely. Instead of evaluating your credit score, platforms look at the value of your collateral. If you can put up enough crypto, you can access a loan, often within minutes.
One term you'll see constantly is Loan-to-Value (LTV) ratio. This measures how much you can borrow relative to your collateral. A 50% LTV means depositing $10,000 in Bitcoin lets you borrow $5,000. Lower LTV ratios are safer but give you less capital to work with.
The mechanics are fairly straightforward once you see the flow. Here's how a typical crypto loan works from start to finish.
If you want to borrow, you transfer cryptocurrency into the platform's wallet as collateral. Common choices include BTC, ETH, and stablecoins like USDC.
If you want to earn yield instead, you deposit idle assets into a lending pool. Your crypto then becomes available for borrowers to use.
Collateral is simply the asset you pledge to secure a loan. If you don't repay, the lender can claim it.
The platform connects people who have capital with people who want to borrow it. On CeFi platforms, the company sets interest rates directly. On DeFi protocols, rates adjust automatically based on supply and demand, more borrowers means higher rates for lenders.
Lenders receive yield as their assets get borrowed. Some platforms pay interest hourly or daily, while others compound it over time.
Borrowers receive stablecoins or fiat without selling their crypto. This matters if you believe your holdings will appreciate, you get liquidity now without giving up future upside or triggering a taxable sale.
Borrowers repay the principal plus accrued interest to get their collateral back. Lenders can withdraw their deposited assets along with earned interest, though some platforms have lock-up periods.
Liquidation happens when your collateral's value drops below a certain threshold. The platform automatically sells your assets to cover the loan, and you lose that collateral permanently. This is the biggest risk for borrowers.
Not all lending platforms work the same way. The main split is between centralized and decentralized options, and the differences affect everything from custody to how interest rates are determined.
CeFi stands for centralized finance. CeFi platforms operate like traditional financial companies, they hold custody of your assets, require identity verification (KYC), and set interest rates themselves.
The trade-off is convenience versus counterparty risk. You get a familiar experience, but your funds depend entirely on the platform's solvency and security practices. If the company fails, your assets may be locked or lost.
DeFi stands for decentralized finance. DeFi protocols use smart contractsDeFi stands for decentralized finance. DeFi protocols use smart contracts, self-executing code on a blockchain, to automate lending without intermediaries. There's no KYC, and you typically connect your own wallet rather than depositing into a company's custody.
The trade-off here is different: you maintain more control, but you're also responsible for understanding how the protocol works. Smart contract bugs can lead to losses, and there's no customer support to call if something goes wrong.
Flash loans are a DeFi-specific innovation. They're uncollateralized loans that get borrowed and repaid within a single blockchain transaction. If the loan isn't repaid by the end of that transaction, the whole thing automatically reverses.
Flash loans are primarily used for arbitrage, liquidations, and collateral swaps. They're not designed for beginners looking for yield or liquidity, they require technical knowledge and are typically executed by bots or advanced users.
Borrowing against crypto instead of selling it offers a few distinct advantages, though the right choice depends on your situation.
Crypto loans are collateral-based, not credit-based. This makes them accessible to people without traditional credit history, those in regions with limited banking infrastructure, or anyone who prefers to keep credit bureaus out of the picture.
Unlike traditional bank loans that can take days or weeks, crypto loans often fund within minutes. DeFi loans can be instant, you interact with a smart contract and receive funds in the same transaction.
This is the main appeal for many borrowers. If you believe your crypto will appreciate, selling triggers a taxable event and removes your exposure to future gains.
Borrowing against it lets you access cash while keeping your position. You might borrow USDCBorrowing against it lets you access cash while keeping your position. You might borrow USDC against your ETH to cover expenses, then repay the loan later, all without selling a single token.
Crypto lending isn't free money. The yields and liquidity come with real risks that have caused significant losses for participants over the years.
CeFi platforms can fail. When they do, user funds may be locked, lost, or tied up in lengthy bankruptcy proceedings. Several major lending platforms collapsed during the 2022 market downturn, leaving depositors unable to withdraw.
If your collateral's value drops sharply, you may face liquidation. The platform sells your assets to cover the loan, often at unfavorable prices, and you lose that collateral entirely.
Monitoring your LTV ratio is essential. Some platforms offer alerts or let you add collateral before liquidation triggers, but the responsibility falls on you.
DeFi protocols rely on code, and code can have bugs. Even audited contracts have been exploited. Audits reduce risk but don't guarantee safety, millions have been lost to smart contract exploits over the years.
Some CeFi platforms re-lend your deposited collateral to generate additional yield. This practice, called rehypothecation, increases counterparty risk. If the platform's borrowers default, your collateral may be affected even if you've done nothing wrong.
Crypto lending regulations vary by jurisdiction and continue to evolve. Platforms may restrict services, require additional compliance, or shut down entirely based on regulatory pressure. What's available today may not be available tomorrow.
Interest earned from lending is typically treated as taxable income in most jurisdictions. The fair market value at the time you receive it usually determines the taxable amount.
Receiving a loan is generally not a taxable event, you're borrowing, not selling. However, if your collateral gets liquidated, that may trigger capital gains or losses depending on your cost basis.
Tax treatment varies significantly by country, so consulting a tax professional familiar with crypto is advisable before participating.
With dozens of options available, evaluating platforms carefully can help you avoid unnecessary risk.
The most fundamental question is: who holds the keys? Custodial platforms control your assets, which creates counterparty risk. Non-custodial options let you retain control, though you're responsible for your own security.Non-custodial options let you retain control, though you're responsible for your own security.
If custody matters to you, self-custodial alternatives, like earning yield through platforms that don't take possession of your funds, may be worth exploring.
Advertised APY doesn't always reflect what you'll actually earn. Look for hidden fees on deposits, withdrawals, or conversions. Compare net yields after all costs are factored in.
Check whether the platform has undergone third-party security audits. Look for bug bounty programs, insurance funds, and the team's track record. A history of transparency is a positive signal.
Not every platform supports every token or blockchain. Verify your specific assets are supported before depositing, and check whether the platform operates on chains you're comfortable using.
If you've decided to participate, here's a typical path forward.
Research CeFi versus DeFi options based on your risk tolerance and custody preferences. Consider rates, security, supported assets, and regulatory status in your region.
For DeFi protocols, you'll connect a self-custodial walletFor DeFi protocols, you'll connect a self-custodial wallet. For CeFi platforms, you'll create an account and complete identity verification.
Transfer crypto to the platform or protocol. Double-check wallet addresses, transactions are irreversible. Verify minimum deposit requirements and any lock-up periods before sending.
If you're lending, select your asset and review the expected yield. If you're borrowing, set your loan amount and review the LTV ratio, interest rate, and liquidation threshold.
Track your collateral value, accrued interest, and LTV ratio regularly. Be prepared to add collateral or repay early if market conditions move against you.
Yes. DeFi protocols and some non-custodial platforms allow earning yieldYes. DeFi protocols and some non-custodial platforms allow earning yield while you retain control of your private keys. Smart contract risks still apply, but you're not trusting a company to hold your funds.
Some self-custodial money apps also offer integrated savings features with competitive yields, up to 8% AER in some cases, without requiring you to transfer assets to a third party. Competitive yields, up to 8% AER in some cases, without requiring you to transfer assets to a third party.
Failures typically resulted from poor risk management, overleveraged positions, lack of transparency, and sudden market downturns that triggered mass liquidations. Some platforms had lent out more than they could cover, and when withdrawals spiked, they couldn't meet obligations.
Look for third-party attestations from reputable auditing firms, on-chain reserve tracking that you can verify independently, and regular audit reports published by the platform. Transparency about reserve composition and methodology is a positive sign.
Regulations vary by jurisdiction and are actively evolving. Some platforms restrict services in certain regions or require specific licenses. In the EU, MiCA regulations are shaping how crypto services operate. Always check local laws and platform availability before participating.
Minimums vary widely. Many DeFi protocols have no minimum, you can deposit any amount, though gas fees may make small deposits impractical. CeFi platforms often require set deposit amounts, sometimes $100 or more.
Yes. Stablecoins like USDCYes. Stablecoins like USDC are commonly lent and often offer competitive yields. Since their value is pegged to fiat currency, you avoid the price volatility risk that comes with lending BTC or ETH, though platform and smart contract risks remain.
Crypto lending offers real opportunities to earn yield or access liquidity, but the risks are equally real. Platform failures, liquidations, and smart contract exploits have cost participants billions over the years.
The custody question sits at the center of many of these risks. When you deposit assets into a CeFi platform, you're trusting that company with your funds. When you use DeFi, you're trusting the code.
For those who prioritize ownership, self-custodial alternatives exist. Bleap's savings feature, for example, offers up to 8% AER on deposited euros and USDC, integrated into the same account you use for spending and trading, without requiring you to hand over custody of your assets. Your funds stay on-chain and under your control.
Whether you choose traditional crypto lending or ownership-first alternatives, understanding the trade-offs helps you make decisions that match your risk tolerance and goals.
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