Crypto Lending
I. What is crypto lending?
Crypto lending lets borrowers pledge cryptocurrency as collateral to secure loans, typically disbursed in fiat currency or stablecoins. Instead of selling Bitcoin or Ethereum to access cash, borrowers lock their digital assets with a platform and receive liquidity while maintaining their crypto positions.
The mechanics differ sharply from traditional secured credit. Platforms use loan-to-value (LTV) ratios between 50% and 90%, meaning $10,000 in Bitcoin collateral yields $5,000 to $9,000 in cash. No credit checks, no income verification, just collateral value and automated risk management.
II. How does crypto lending work?
Over-collateralization as volatility protection
Crypto loans require borrowers to pledge cryptocurrency worth 200% to 300% of the loan amount. To borrow $1,000, expect to deposit $2,000 to $3,000 in Ethereum. This isn't lender greed, it's math. When collateral can drop 20% in a day, traditional 80% LTV ratios become catastrophically risky.
The buffer protects lenders, but it also limits who can access crypto loans. Only borrowers with substantial existing holdings qualify, creating a self-selecting customer base that skews toward crypto enthusiasts rather than mainstream consumers.
Centralized vs. decentralized platforms
Centralized platforms (CeFi) operate like digital banks. They custody your collateral, set loan terms, and handle liquidations. Borrowers get lower rates and user-friendly interfaces but must trust the platform with asset custody. When centralized platforms fail, and several have, borrowers lose collateral regardless of loan status.
Decentralized platforms (DeFi) eliminate the intermediary through smart contracts that automatically enforce terms and liquidate collateral based on price feeds. Greater transparency, but also greater complexity. Borrowers need technical knowledge, and smart contract bugs can drain funds faster than any bank failure.
III. Margin calls and liquidation
When crypto prices drop, collateral value falls below the platform's threshold and triggers a margin call. Borrowers must add collateral or repay part of the loan within hours, sometimes minutes. Miss the deadline and the platform automatically liquidates enough collateral to cover the loan.
This speed differentiates crypto lending from traditional secured lending. Real estate foreclosures take months and involve courts. Crypto liquidations happen algorithmically in minutes based on price feeds. The efficiency protects lenders but creates hair-trigger risk for borrowers during volatile markets.
IV. Why traditional lenders are watching crypto lending
Some financial institutions see crypto-backed loans as a way to serve customers holding digital assets without forcing liquidation. The pitch sounds appealing: over-collateralized loans with instant liquidation capabilities should mean lower default risk than unsecured credit.
The reality is more nuanced. Yes, you can liquidate collateral instantly. But you're also betting your risk models on 24/7 markets with occasional flash crashes, price manipulation, and liquidity gaps during high volatility. Traditional credit risk assessment doesn't translate cleanly when collateral can swing 30% between Monday and Friday.
V. What lenders underestimate about crypto lending
The operational lift surprises most lenders. You need real-time collateral valuation systems monitoring prices across multiple exchanges, automated margin call infrastructure that triggers faster than any manual process, and secure custody solutions that satisfy both crypto security standards and traditional banking regulations.
Regulatory uncertainty adds another layer. Different jurisdictions treat cryptocurrency collateral differently, rules change frequently, and compliance requirements continue evolving. Anti-money laundering obligations apply, but the pseudonymous nature of crypto transactions complicates standard KYC processes.
The technology stack for crypto lending looks nothing like traditional loan servicing infrastructure. Batch processing doesn't work when collateral value updates every second. Manual margin call notices arrive too late when liquidation thresholds get crossed at 3 AM on Sunday.
Modern lending platforms can help bridge this gap. LoanPro's API-first architecture supports the real-time data flows and automated risk responses that crypto lending requires, letting lenders build custom collateral monitoring and margin call workflows without replacing their entire tech stack. The infrastructure challenges are real, but they're solvable with systems built for the speed and flexibility that crypto as collateral demands.