What Are Crypto Lending Platforms?
Crypto lending platforms let you borrow crypto against collateral or earn yield by lending out your assets. We explain the difference between CeFi and DeFi models, where the yield comes from and what the main risks are.
Table of contents:
What is crypto lending?
Crypto lending is a service in which some users lend out their crypto-assets, while others borrow them against collateral and pay interest.
The intermediary is the platform: either a centralised company or a decentralised protocol that runs on smart contracts.
The model resembles traditional banking, but with a few important differences. The collateral is usually also cryptocurrency, the processes are largely automated, and the protection that applies to bank deposits generally does not exist.
That is exactly why it is important to understand how these platforms work before entrusting them with your assets.
How crypto lending works
There are two sides on a lending platform. Lenders deposit crypto-assets (often stablecoins such as USDC, or cryptocurrencies such as ETH) and receive interest in return. Borrowers deposit collateral and use it to borrow other assets.
Most crypto loans are overcollateralised: the value of the collateral is higher than the value of the loan. This ratio is expressed as LTV (loan-to-value). For example, with €10,000 in collateral and an LTV of 50%, a user can borrow up to €5,000.
Why would anyone borrow against collateral worth more than the loan itself? The most common reasons are:
- accessing liquidity without selling cryptocurrency they want to keep
- funding trading strategies, including the use of leverage
- liquidity management for companies and market makers
If the value of the collateral falls and the LTV crosses the liquidation threshold, the platform automatically sells some or all of the collateral to cover the loan. More on this in the section on risks.
CeFi and DeFi lending platforms
Lending platforms fall into two main groups, and the difference lies in who holds the assets and who makes the decisions.
Well-known examples of DeFi protocols include Aave, Compound and Sky (formerly MakerDAO). On the CeFi side, many platforms shut down after 2022, as covered below.
Neither model is risk-free. The difference lies in whom the user trusts: a company or code.
Where the yield comes from
The yield a lender earns comes from the interest paid by borrowers, minus the platform’s fee. If demand for loans is low, the yield is low too.
In DeFi protocols, the interest rate usually depends on the utilisation rate, i.e. the share of deposited funds that is currently on loan. When utilisation is high, rates rise to attract new lenders and encourage borrowers to repay. That is why rates can change from hour to hour.
CeFi platforms generally set their own rates and generated part of the yield by investing users’ funds in their own strategies. In the past, this was the source of serious problems.
A useful rule of thumb: if the yield on offer is significantly higher than the market rate, it is worth asking where it actually comes from and who bears the risk.
Main risks
Crypto lending carries several types of risk that are important to distinguish.
Liquidation risk
If the price drops sharply, the collateral can be sold automatically and with an additional fee, causing the borrower to lose part of their assets.
Counterparty risk
With CeFi platforms, the user depends on the solvency and integrity of the company holding their assets.
Smart contract risk
A bug in the code or a vulnerability in an oracle (a price feed) can lead to a loss of funds in a DeFi protocol.
Liquidity risk
When most of the funds are on loan, a lender may not be able to withdraw their assets immediately.
Stablecoin risk
If a stablecoin loses its peg to the dollar or the euro, the real value of both the loan and the yield changes.
Lessons from 2022
During 2022, several major CeFi lending platforms, including Celsius, Voyager and BlockFi, suspended withdrawals and filed for bankruptcy. Genesis followed in early 2023. The common thread was similar: users’ funds were invested in risky strategies or lent out without sufficient security, and users had no clear view of this.
These events showed that high yields without transparency can conceal significant risk, and they accelerated regulatory discussions in the EU and beyond.
What to look out for
Before you deposit or borrow crypto-assets, it is worth checking a few things:
- Who holds the assets? With CeFi platforms, check whether users’ assets are kept separate from the company’s own assets and whether the company is allowed to lend them on.
- Is the platform licensed? Check whether the service provider is authorised to operate and with which supervisory authority it is registered.
- What are the LTV and the liquidation threshold? Know in advance at what price the collateral will be sold and what the liquidation fees are.
- Has the code been audited? With DeFi protocols, check whether there are independent smart contract audits and how long the protocol has been running without incidents.
- Where does the yield come from? If the platform does not explain this clearly, that in itself is a warning sign.
- How quickly can you withdraw your funds? Check whether there are lock-up periods or withdrawal limits.
It is also wise not to put funds into lending that you could not afford to lose.
Conclusion
Crypto lending platforms offer two useful tools: access to liquidity without selling your cryptocurrency, and the opportunity to earn yield on assets that would otherwise sit idle. At the same time, they carry risks that differ from those of traditional investing, ranging from collateral liquidation to platform insolvency or a bug in the code.
The regulatory framework in the EU is still taking shape, so right now it is especially important to check for yourself how a platform works, who holds the assets and where the yield comes from. Understanding these basics is the best starting point for an informed decision.
Disclaimer: Bitcoin Store is not a financial advisory firm and is not authorised to provide investment or financial advice. The opinions, analyses and other content on our website are for informational purposes only and should not be considered a basis for making investment decisions. Cryptocurrency trading involves speculation, and prices can fluctuate rapidly, which may result in the loss of your investment. Before investing in cryptocurrencies, be sure to seek independent advice and make sure you fully understand the risks associated with this type of financial instrument.
