What is crypto lending? How it works, rates and risks

Crypto lending is the business of lending out cryptocurrency for interest, or borrowing against crypto you already own. It is one of the oldest and largest parts of DeFi, and it also runs through centralised companies and trading firms. This explainer covers how it works on both sides, how interest rates and collateral are set, how it differs from staking, and what can go wrong. It is educational and not financial advice.

Lending and borrowing: the two sides

Lenders deposit coins, most often stablecoins such as USDC or USDT, or ether and wrapped bitcoin, into a lending pool or platform. Borrowers pay interest on what they take out, and lenders receive most of it.

Borrowers lock collateral and take a loan against it. Why borrow instead of selling? Common reasons are to get cash without selling a long-term holding (and, in some countries, without a taxable sale), to use leverage, to short a token, or to move between assets. Funds and trading firms borrow too: Galaxy Digital said its average loan book reached $1.8 billion in the third quarter of 2026, partly through a product that taps DeFi markets such as Aave and Morpho, as we reported today.

How DeFi lending works

DeFi lending protocols such as Aave, Compound and Morpho are sets of smart contracts. There is no loan officer and no credit check; the code decides.

1. You deposit an asset into a pool and get a receipt token (for example aUSDC on Aave) that grows as interest accrues.
2. Borrowers post collateral in another asset. Each asset has a maximum loan-to-value (LTV): with a 75% LTV, $1,000 of ETH lets you borrow up to $750.
3. Interest is set by utilization, the share of the pool that is lent out. When few people borrow, rates are low; when the pool is nearly empty, rates climb steeply so lenders can still withdraw. In October 2026 Aave lowered the point where USDT rates spike from 94% to 92% utilization for exactly that reason.
4. The loan stays open as long as the collateral is worth enough. There is no repayment schedule; interest simply adds to your debt.
5. If collateral falls, the position's safety score (Aave calls it the health factor) drops. Below 1, outside liquidators can repay part of your debt and take some of your collateral at a discount. Our guide to liquidation in crypto walks through an example.

DeFi also offers flash loans: uncollateralised loans that must be borrowed and repaid within a single blockchain transaction. They are used for arbitrage and refinancing, but also often appear in hacks.

A worked example

Say you deposit 1 ETH worth $3,000 and borrow $1,500 of USDC, 50% of the collateral's value. If the liquidation threshold for ETH is 80%, you are liquidated when your debt exceeds 80% of the collateral's value. That happens if ETH falls to about $1,875 (1,500 ÷ 0.8), a drop of roughly 37.5%, ignoring interest. Borrow $2,200 instead and the liquidation price rises to $2,750, only about 8% below today's price. These figures are illustrative; each protocol and asset has its own parameters.

DeFi vs CeFi lending

Centralised (CeFi) lenders take your coins into their own accounts and lend them on, a model closer to a bank. Several of the biggest collapsed in 2022: Celsius and Voyager filed for bankruptcy in July 2022, BlockFi in November 2022 and Genesis's lending arm in January 2023, freezing customers' funds for months or years.

Vaults and curators

A newer layer sits on top of the pools. Vaults pool depositors' money and spread it across lending markets chosen by a curator, a risk firm or fund that sets limits on collateral and exposure. Deposits in such vaults have passed $10 billion, but a vault is only as safe as the markets and the curator behind it, and higher advertised yields usually mean riskier collateral.

Lending vs staking

They are often lumped together in "earn" menus, but they are different. Staking locks tokens to help secure a proof-of-stake network, and rewards come from the protocol. Lending hands your tokens to borrowers, and interest comes from them. See what crypto staking is for the other half.

The main risks

• Liquidation: borrowers can lose collateral in fast price drops, sometimes before they can react.
• Smart-contract and oracle risk: a bug or manipulated price feed can drain a pool.
• Bad debt: if collateral cannot be sold fast enough, lenders absorb the shortfall. Aave keeps a backstop called Umbrella for this, and its stablecoin backstops shrank by $12.4 million in one month.
• Withdrawal freezes: when a pool is fully borrowed, lenders may have to wait until borrowers repay or rates pull in new deposits.
• Counterparty risk on CeFi platforms, as 2022 showed.
• Stablecoin and depeg risk: lending a stablecoin is only as safe as the stablecoin itself.

How to approach it carefully

1. Start with long-running, audited protocols and the official app URL.
2. Borrow well below the maximum LTV and watch your liquidation price.
3. Understand that advertised rates change constantly with demand.
4. Keep lending funds in a separate wallet, and review token approvals regularly.