What Is Crypto Lending? A Beginner’s Guide

Crypto Lending

Discover what you must know about crypto lending on DeFi vs CeFi platforms.

Usually, when I need money, I go to a bank, make my case, follow the loan application procedure, and wait to hear back. Then, I sign a lending contract and agree on repayment terms. I’m locked into a loan based on rates and criteria set by the bank

More recently, I’ve explored how crypto lending works as means of investing and also funding parts of my business. I’ve invested in cryptocurrency for a few years, so I’m reasonably comfortable managing digital assets and taking on the extra risks associated with crypto lending. I also have collateral I can use for crypto lending, and the rates struck me as cheaper and the borrowing process easier.

In this informational article, I’ll describe my experiences and mistakes.

Remember I’m not a financial advisor. Crypto lending is incredibly risky. You could lose all of your money, and it could go to zero. So the content in this article is simply for informational purposes.

Crypto lending describes using cryptocurrency investments as collateral to borrow either more cryptocurrency or traditional currency. Borrowers can use up to 50-75% of their assets as collateral on centralised finance (CeFi) or decentralized finance platforms (DeFi).

Centralized finance describes structured financial services like BlockFi, or Celsius, or Nexo. Run as an entity, they’re similar in some respects to a bank, except CeFi focuses on web 3.0 tokens and coins, like Bitcoin, Ethereum and other tokens. CeFi entities also have custody over your crypto.

Nexo, which I use, is comparable to Celsius and BlockFi. The interest rates and process for borrowing vary across these CeFi platforms, i.e. do your own research, but the lending process is similar.

Decentralized finance describes open-source platforms like Aave and Compound. There, you can deposit and stake crypto and potentially take loans. It’s all powered by smart contracts and underpinning technology. On DeFi, you maintain custody over crypto via your hardware or software wallet, but it’s locked up in a smart contract.

While researching this article, I took out loans on Nexo (CeFi) and Aave platform (DeFi) to learn more about how both operate. I also wanted to source some funds for my business without selling my Bitcoin.

Aave is a relatively established and secure decentralized finance platform. Popular alternatives include Compound and MakerDao. Many others exist, but smaller and newer ones are more prone to risks, i.e. they could be hacked, and you could lose your crypto.

How Crypto Lending Works

Whether you’re borrowing on CeFi on DeFi, crypto lending operates based on collateral. Essentially, a would-be borrower deposits their traditional or cryptocurrency assets and uses them to borrow.

A borrower must complete know-your-customer procedures if using CeFi. If using DeFi, they can borrow relying on a smart contract.

A borrower can draw down a certain percentage of their deposit (usually up to 75%) at a variable or fixed interest rate. A borrower can use these funds as they wish and repay their loan at a future date or immediately. It’s powered by smart contracts and underpinned by blockchain technology, rather than by human assessors.

Apart from the usual reasons for a loan, web 3.0 proponents borrow to avoid capital gains taxes from selling crypto, pay a tax bill, and invest in more crypto.

If you’re considering crypto lending, evaluate one based on these criteria:

  • Interest rates
  • Cost
  • Risks i.e. is it a newer platform? (Aave is relatively safe)
  • Loan length
  • Collateral required

Crypto Lending On CeFi

Crypto lending on CeFi
Borrowers don’t receive rewards on collateral tied up with loans

To take out a Nexo loan, I set up an account and completed its know-your-customer verification procedures, which took an hour.

Then, I transferred some Bitcoin and Ethereum from my hardware wallet into my Nexo account. I was pleasantly surprised to find I started receiving daily staking rewards for depositing my Bitcoin and Ethereum. The rate was approximately 5%.

Using this collateral in my wallet, I could borrow 50% of my Bitcoin value from Nexo. (Borrowers don’t receive rewards on collateral tied up with loans.)

It took me a couple of clicks to borrow $500 in USDC from Nexo platform, and I received the funds almost instantly. I converted some to Ethereum and transferred the rest to a cryptocurrency exchange to buy an NFT.

CeFi Risks

The interest rates were comparable to a bank, but borrowing was comparatively easier and faster. Aside from variable interest rates, here’s the key risk:

If my Bitcoin collateral plunges in value, Nexo can sell some of my collateral to cover my loan. In other words, I could lose my original investment unless I maintain a health loan-to-value ratio below 50%.

Manage Your LTV Ratio

Ensuring is healthy loan-to-value ratio is key for borrowers. Unlike traditional loans, this ratio can fluctuate if the price of Bitcoin, Ethereum, or collateral changes.

If you’re worried, you can also deposit traditional currency, use this as collateral to borrow, and get paid interest on it, much like a bank. Nexo alerts borrowers if their LTV ratio drops to an unhealthy level.

Nexo said it would initiate micropayments if my LTV ratio dropped below 50%. As I lodged .75 BTC and only borrowed $500, my chances of liquidation are low. I can also pay back this loan any time using any asset, but if I choose to repay within the first 30-days, I’m charged interest for the entire 30-day period.


  • Easy to use
  • Relatively secure
  • Borrowers can repay in any currency
  • Customer service available


  • Comparatively lending higher rates versus DeFi
  • Staking less attractive than DeFi

Crypto Lending on DeFi

Crypto Lending on DeFi
The CeFi platform entities also earn money via DEFi

Crypto lending and staking proponents regularly advocate from DeFi over CeFi. The CeFi platform entities also earn money via DEFi, i.e. they take your collateral and stake or borrow against it on DeFi platforms.

When I discovered this, I immediately wanted to learn how they’re making money using web 3.0 investments. I started with Aave, the second-largest CeFi platform.

I deposited several Ethereum into the Aave platform and verified my transactions with a hardware wallet. I also wrapped some Bitcoin on Kraken and deposited that as well. Then, I borrowed some Tether, a crypto stable coin backed to the US dollar.

DeFi Risks

The key risks of DeFi are similar to CeFi i.e. you can lose your crypto. Aave has an LTV ratio of 75% depending on the coin or token. Fall below it and you’ll lose initial investment and pay a potential liquidation fee, approximately 10.

Interest rates also fluctuate widely on DeFi. Typically, they range between 2% and 4% for borrowing a stable coin. Some days interest rates can shoot up to 30% or even higher. It’s better to look at the 30-day average rather than the current variable rate.

Although you repay in any currency, it’s usually safer to borrow in stable coins due to price fluctuations. That way, you don’t have to worry about repaying a big loan if Ethereum rises in price suddenly.

DeFi Risks
Using the blockchain explorer for Ethereum, I could see my aUSDT on the blockchain

I transferred my borrowed Tether to the Kraken cryptocurrency exchange directly using the Ledger Live app. But, my funds never arrived in the Kraken exchange.

Using the blockchain explorer for Ethereum, I could see my aUSDT on the blockchain. However, Kraken support said I’d transferred a wrapped version of Tether, i.e. aUSDT and not USDT. My wallet didn’t recognize this version, and I lost my initial loan.

Suffice to say, that was a stressful afternoon. I should have withdrawn the money from Aave first… before attempting a transfer i.e. unwrapping my Tether. In short, my user error underpins one of the key risks with DeFi crypto lending.

On DeFi, you’re entirely responsible for managing a loan and any underlying assets. Users are responsible for anything that goes wrong. There’s no one to call or complain to (trust me, I tried!).

My experiences were somewhat more positive once I learnt more about using DeFi platforms.

Expect Hidden Costs

DeFi platforms
Gas fees can eat into DeFi loan savings 

Crypto loans have some appealing rates but expect hidden costs. If you’re using DeFi platforms, you’ll also incur gas or Gwei fees for managing your loan.

I paid gas fees to deposit my crypto into Aave and again to withdraw it. Unless you’re borrowing large amounts, these fees can quickly eat into the benefits of using these platforms.

You could potentially avoid these fees using a Layer 2 or roll-up solution like Polygon. Essentially, you have to bridge your WBTC or Eth onto the Polygon network. Then, DeFi crypto lending becomes cheaper, but these additional steps may put off those less technically inclined.

After a few weeks, I paid off most of my original loan and navigated to Polygon. Also on Aave, this solution is much easier, faster and cheaper to use. I also get paid Matic on my collateral and my loan.

Get Paid to Borrow

DeFi Platforms like Aave reward users for depositing funds and for borrowing against them. They’ll pay a small percentage in the platform’s underlying token based on your loan. In this case, Aave rewarded me with the Aave token which somewhat offset the loan cost.

When I migrated to Aave on Polygon, it rewarded me with Matic for borrowing. You also get paid this reward after depositing collateral. It’s a nice way of reducing the cost of DeFi crypto lending even further.

Some immersed in the world of DeFi earn a full-time living yield farming whereby they play arbitrage with interest rates on various DeFi platforms. Basically, they borrow USDT on one platform, stake it on another, and profit from the rate differences.


  • Lower borrowing rates when averaged out
  • Better staking options
  • Support for more assets and blockchains


  • More technical and involved than CeFi crypto lending
  • User responsible for custody and security
  • No customer service

Crypto Lending: The Final Word

DeFi and CeFi platforms will radically change how creators navigate the Creator Economy to invest in Web 3.0 and to fund their businesses.

Deciding on CeFi or DeFi crypto lending depends on your personal preferences, finances and risk tolerance.

Remember to maintain a healthy LTV ratio. If you’re concerned, you can play around with potential liquidation scenarios before borrowing using GMI Tools.

Interest rates vary a lot. Rather than evaluating based on today’s interest rate, I recommend using a website like Defirate. There, you can track the rate over the past 30 days and make a more accurate comparison.

Unless you’re confident and competent in managing crypto, CeFi is more secure than DeFi. It’s also much easier to borrow on CeFi. However, the staking and borrowing rates and LTV ratio are more favourable on DeFi.

FAQs About Crypto Lending

Is crypto lending safe?

Crypto lending is safe if you’re comfortable managing digital assets and tokens. Lending on CeFi is easier and less prone to user error. DeFi lending is more financially favorable but requires some knowledge of hardware and software wallets.

Can I borrow money to invest in crypto?

Borrowing money to invest in crypto is risky due to price fluctuations. You can use crypto as collateral to borrow stable coins and then buy more crypto if you’re comfortable with that.