Crypto loans reached a record $73.6B in Q3 2025, and the mechanism behind them is simpler than most beginners expect — deposit cryptocurrency as collateral, receive a loan in stablecoins or cash, repay with interest, and get your crypto back without ever selling it.
TL;DR:
- Crypto loans let holders borrow against their assets without selling, avoiding capital gains taxes and keeping exposure to future price gains.
- The market split into two camps: centralized platforms (CeFi) like Nexo and Ledn, and decentralized protocols (DeFi) like Aave and Compound, with DeFi now commanding roughly two-thirds of all lending activity.
- Overcollateralization is standard — most borrowers must lock up more value than they receive — and liquidation risk remains the biggest danger, as the Oct. 2025 crash proved when $19B in positions were wiped out in a single day.
What Exactly Is a Crypto Loan?
A crypto loan works like a pawnshop, but for digital assets. The borrower hands over Bitcoin (BTC) or Ethereum (ETH) as collateral. The lender holds that collateral and issues a loan.
The loan usually arrives in stablecoins such as USDC (USDC), Tether (USDT), or Dai (DAI). Some centralized platforms also offer fiat currencies like USD or EUR.
The borrower pays interest over the loan term. It could be weeks. It could be months. Once the borrower repays the full amount plus interest, the collateral goes back.
No credit check is required. No employment verification either.
The collateral itself is the guarantee, which is why these loans exist outside the traditional banking system entirely.
What makes this different from a bank loan is that the borrower's creditworthiness does not matter. The only thing the lender cares about is whether the collateral retains enough value to cover the outstanding debt.
If the collateral drops too far in value, the lender sells it automatically. That process is called liquidation, and it happens without warning on most platforms. More on that later.
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CeFi vs. DeFi: Two Ways to Borrow
The crypto lending market splits into two distinct camps. One is centralized finance, or CeFi. The other is decentralized finance, or DeFi.
CeFi platforms operate like fintech companies. A borrower creates an account, completes identity verification, deposits collateral, and selects loan terms. The company holds the collateral in its own wallets. It sets the interest rates. It handles customer service.
Nexo, which manages more than $11B in customer assets, is among the largest CeFi lenders operating today. Ledn, a Toronto-based firm focused on Bitcoin-backed loans, has processed over $10B in cumulative lending since 2018.
But the CeFi side of the market shrank dramatically after 2022. Three dominant lenders — Celsius, BlockFi, and Genesis — all went bankrupt within months of each other. They had controlled 76% of CeFi lending with $26.4B in combined loans outstanding. All three collapsed.
Today, three different firms dominate the CeFi market. Tether holds roughly 57–60% market share. Nexo sits at roughly 11%. Galaxy Digital holds about 6%. Together they control 89% of the centralized lending space.
DeFi lending works differently at every level. There is no company. There is no account. There is no identity verification. Instead, a borrower connects a cryptocurrency wallet to a smart contract — a self-executing program on a blockchain — and deposits collateral directly.
The smart contract issues the loan automatically.
Interest rates adjust in real time based on supply and demand within the protocol's liquidity pools.
Aave is the dominant DeFi lending protocol by a wide margin. It crossed $1 trillion in cumulative lending volume in early 2026 and holds roughly $25–27B in total value locked. It operates across 14 blockchain networks.
Other significant DeFi protocols include Morpho (around $6.9B in TVL), Sky Protocol (formerly MakerDAO, around $6.9B), and Compound (around $1.3B).
As of Q3 2025, DeFi accounted for 66.9% of all crypto-collateralized borrowing when including collateralized debt position stablecoins like DAI. That is a dramatic reversal from the 2020–2021 cycle, when DeFi's share sat at just 34%.
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Why Collateral Is Required — and Why So Much of It
Crypto loans are overcollateralized. That means a borrower must deposit more value than the amount borrowed. The reason is volatility.
BTC or ETH can drop 20–30% in a single day. Without a cushion, the lender would be left holding collateral worth less than the loan. Overcollateralization builds in that cushion.
The key metric is the loan-to-value ratio, or LTV. At 50% LTV, a borrower deposits $10,000 in Bitcoin and receives a $5,000 loan. The collateral would need to fall by half before the loan becomes underwater.
Standard LTV ratios vary by platform and asset. Most CeFi platforms offer 50% LTV for Bitcoin-backed loans. Some go higher — Figure allows up to 75%, while YouHodler pushes as high as 90%. DeFi protocols enforce similar thresholds through smart contracts: Aave allows 50–75% depending on the asset, and MakerDAO requires a minimum 150% collateral ratio.
Higher LTV means more borrowed cash. But it also means a much thinner margin of safety before liquidation.
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How Liquidation Works
Liquidation is the lender's safety valve. When the value of the collateral falls too far, the platform sells enough of it to cover the outstanding debt.
Most platforms operate on a three-tier warning system. Using Strike as an example: the initial LTV caps at 50%, a margin call triggers at 70% LTV to alert the borrower, and automatic liquidation fires at 85% LTV. At that point, Strike sells roughly 57% of the collateral to restore the ratio to a safer level.
In DeFi, liquidation works differently.
Third-party bots monitor the blockchain continuously. When a borrower's position crosses the liquidation threshold, a bot repays part of the debt and receives the collateral at a 5–10% discount. That discount is the incentive for the bot operator.
The Oct. 10, 2025 market crash illustrated liquidation risk at scale. In a single day, $19.16B in positions were liquidated across the market, affecting more than 1.6 million traders. It was the largest liquidation cascade in crypto history.
Borrowers can reduce liquidation risk by keeping their LTV conservative. A 30–40% LTV provides a meaningful buffer. Adding more collateral when prices decline also helps. But the risk never disappears entirely.
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What Borrowers Usually Borrow — and What They Pledge
The most commonly borrowed assets are stablecoins. USDC leads, followed by USDT and DAI. Stablecoins settle near-instantly on-chain, maintain a 1:1 USD peg, and require no banking rails to move around.
CeFi platforms like Nexo support fiat disbursements in more than 40 currencies.
DeFi is almost exclusively crypto-to-crypto, with stablecoins serving as the fiat substitute.
On the collateral side, Bitcoin gets the best terms everywhere. It carries the lowest volatility among major crypto assets, the deepest liquidity, and the longest track record. ETH is the second most accepted collateral, though it typically receives slightly lower LTV limits — Arch Lending, for instance, offers 60% LTV for BTC but only 55% for ETH.
Solana (SOL) has gained acceptance more recently. Arch offers 45% LTV for SOL-backed loans. Some platforms accept 50 or more assets as collateral, though terms get progressively less favorable for smaller tokens.
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