Crypto Lending

Crypto lending is the business of lending crypto assets, including stablecoins, or lending cash against crypto collateral. Lenders, from retail savers to trading firms, earn interest; borrowers use the loans to raise cash without selling their coins, to trade with leverage, to short assets or to fund market-making. The borrower's side of the same arrangement is also called crypto borrowing.

Crypto lending runs through two very different channels. Centralized lenders, part of centralized finance (CeFi), take custody of customers' assets and lend them on, much like a lightly regulated bank or broker. Decentralized lending runs on smart contracts without an intermediary, covered in detail under decentralized lending protocol. Both are close relatives of margin trading and securities lending in traditional markets.

Crypto lending works much like a pawnshop. You bring in something valuable, such as a gold watch, and walk out with less cash than it is worth. If you repay with interest, you get the watch back. If you do not, the shop sells it.

The twist is that the "watch" can lose a third of its value in a day. So the shop watches the price constantly, and if the value of your collateral falls too close to the loan, it sells it straight away, without waiting for you. On the other side, people who leave their coins with the shop so it can lend them out are trusting that the shop will still exist when they want them back.

Most crypto loans are over-collateralized: the borrower deposits collateral worth more than the loan, as in other over-collateralized loans. The key measure is the loan-to-value ratio:

• $L$ is the loan balance, including accrued interest.
• $C$ is the quantity of collateral posted.
• $P$ is the current market price of one unit of collateral.

The lender sets a maximum LTV for opening a loan and a higher liquidation LTV. If the price falls far enough that the liquidation level is reached, the collateral is sold to repay the loan, a forced liquidation. The price at which that happens is:

Example: a borrower posts 2 ETH when ETH is $3,000, so the collateral is worth $6,000, and borrows $3,000 in USDC. The starting LTV is $3000 \div 6000 \times 100 = 50\%$. If the liquidation LTV is 80%, liquidation starts when ETH falls to $3000 \div (2 \times 0.80) = 1{,}875$ dollars, a 37.5% drop. Centralized lenders may first send a margin call asking for more collateral; smart contracts usually liquidate automatically.

Some loans need no collateral at all: flash loans must be borrowed and repaid within one blockchain transaction, and a few institutional lenders make uncollateralized loans to known trading firms.

Lenders are paid from what borrowers pay. Demand for borrowing comes mainly from traders seeking leverage or short positions, from basis trades that profit when futures trade above spot prices, and from holders who need cash without triggering a taxable sale. Rates therefore rise in bull markets and fall when speculation cools. Rates in DeFi are set by formulas based on how much of a pool is borrowed; centralized lenders set them by policy. Advertised yields are usually quoted as an annual percentage yield (APY). Yields well above money-market rates have often signalled hidden risk-taking rather than skill.

Centralized crypto lenders grew quickly in 2020–21 by offering retail "earn" accounts paying high interest. Several lent heavily to a small number of trading firms, lent without enough collateral, or invested customer funds in risky strategies. When crypto prices fell in 2022 and the Terra/Luna system collapsed, many could not meet withdrawals:

• Celsius Network froze withdrawals on 12 June 2022 and filed for Chapter 11 bankruptcy on 13 July 2022.
• Voyager Digital filed in July 2022 after a large loan to the hedge fund Three Arrows Capital defaulted.
• BlockFi filed in November 2022, after the failure of the FTX exchange, and Genesis Global Capital's lending arm filed in January 2023.

Customers learned that their deposits were unsecured claims in bankruptcy, not protected balances, which is the core of counterparty risk. The episode resembled a bank run on institutions without deposit insurance, capital rules or a lender of last resort.

In the United States, the SEC treats retail crypto interest accounts as securities: in February 2022 BlockFi agreed to pay $100 million in penalties ($50 million to the SEC and $50 million to 32 states) over its unregistered BlockFi Interest Accounts. Some states also require a lending licence for loans made to residents. In the EU, MiCA does not set up a regime for crypto lending and borrowing itself, leaving it to national law and to future review. The GENIUS Act, the US stablecoin law of July 2025, bars permitted issuers from paying interest to holders, which pushes stablecoin yield-seeking toward lending platforms. Lenders that hold customer assets are also subject to KYC and anti-money-laundering duties.

• Price risk. Sharp falls trigger liquidations, sometimes in cascades that push prices down further.
• Custodial and rehypothecation risk. Centralized lenders re-lend deposited coins; if they fail, depositors rank as unsecured creditors.
• Smart-contract and oracle risk. In DeFi, code bugs or a manipulated blockchain oracle can cause losses.
• Stablecoin risk. Loans made or repaid in stablecoins depend on the peg holding; see depegging.
• Collateral quality. Platforms that accept illiquid tokens, or a protocol's own governance token, as collateral may be unable to sell it in a crash.

Firms that hold stablecoins as part of blockchain treasury management generally treat crypto lending as an investment risk, separate from cash management.

• SEC: BlockFi agrees to pay $100 million in penalties (February 2022)