The crypto lending market has bifurcated into two fundamentally different products that share a name. CeFi crypto-collateralized loans look and feel like bank loans — a platform intermediates, holds your collateral, and sends you money. DeFi protocols eliminate the intermediary entirely — a smart contract holds the collateral and executes the loan. The risk profiles are not comparable. Our guide on CeFi vs DeFi lending covers this in detail. Here is the complete framework.
What crypto-collateralized lending means
Crypto-collateralized lending is a form of secured borrowing where you pledge digital assets (Bitcoin, Ethereum, or other cryptocurrencies) as collateral in exchange for a loan denominated in fiat currency (USD) or stablecoins (USDC). The key structural feature: you do not sell your crypto. You borrow against it.
The platform sets a loan-to-value ratio — the percentage of your collateral's market value that you can borrow. At 50% LTV, $100,000 in BTC supports a $50,000 loan. If your collateral's value falls, the platform issues a margin call. If it falls below the liquidation threshold, the platform sells your collateral to repay the loan.
This is the same logic as a margin loan in traditional finance — but with crypto assets rather than securities as collateral. The difference is that crypto markets operate 24/7 and can move 20% in hours, creating more volatile liquidation dynamics.
BTC vs ETH as collateral: Why Bitcoin dominates
Bitcoin dominates the crypto lending market for structural reasons. First: institutional trust. BTC is the only cryptocurrency with a proven track record as a recognized asset class, regulatory clarity, and institutional custody infrastructure. Lenders are more comfortable accepting BTC collateral because they have exit mechanisms — they can sell BTC into liquid markets quickly.
Second: volatility profile. While BTC is volatile, ETH carries additional risks — including network upgrade risk, DeFi protocol failure contagion, and regulatory uncertainty around whether ETH qualifies as a security. Once you move beyond BTC, lenders and protocols typically cut LTV caps and tighten margin buffers to account for that added risk.
Third: liquidation depth. BTC has the deepest order books of any cryptocurrency. A platform liquidating 10 BTC can do so with minimal market impact. Liquidating $5M of a mid-cap altcoin could move markets significantly against the borrower.
CeFi vs DeFi: The custody divide
CeFi platforms (Ledn, Unchained, Figure, Arch Lending, Nexo): A company holds your collateral. You create an account, verify identity, transfer crypto to the platform's wallet, and receive your loan. The platform manages the collateral, monitors your LTV, and executes liquidation if necessary. You have customer support, regulated structures, and legal recourse — but also counterparty risk.
DeFi protocols (Lava, Aave, MakerDAO): No intermediary. A smart contract holds your collateral and releases your loan based on code-defined rules. You interact directly with the protocol. There is no company to fail — only code to exploit. The upside: no counterparty risk. The downside: no customer support, no legal recourse if you make a mistake, and smart contract risk.
Custody implications: The most important risk factor
The custody model determines what happens to your collateral if the platform fails. This is the single most important risk factor in crypto lending — and the one most borrowers ignore. Our custody models guide breaks down each approach in depth.
Custodial (Ledn, Figure, Nexo, YouHodler): Your crypto is held by the platform. If the platform fails, you become an unsecured creditor — the same situation as Celsius, Voyager, and FTX customers. Recovery rates after crypto platform failures typically range from 30–70 cents on the dollar, and the process takes years. Platforms mitigate this with reserve reporting, third-party attestations, and stricter collateral-use policies, but the structural risk remains.
Multi-sig collaborative custody (Unchained): You hold 2 of 3 keys to your collateral. Unchained holds 1. Even if Unchained disappears, you and your co-signers can move your BTC without the platform. The platform failing does not affect your collateral — structurally.
Non-custodial (Aave, Maker, DeFi protocols): Smart contracts hold your collateral. There is no platform to fail — the contract executes based on code. The risk is smart contract bugs or exploits, which are fundamentally different from platform bankruptcy.
Rehypothecation risk: The hidden danger
Rehypothecation is the practice of a platform lending your collateral to third parties to generate additional yield. The spread between what the platform earns on rehypothecated collateral and what it pays you is profit. The risk: if those third-party loans go bad, your collateral is gone.
This is what killed Celsius. Customers' BTC was rehypothecated to Three Arrows Capital and others. When 3AC defaulted, Celsius customers' collateral was gone. Reserve reporting or third-party attestations showing "1:1 backing" meant nothing if the collateral had been rehypothecated multiple times. For a full account of how platform collapses have affected BTC borrowers, see our guide on platform collapses.
The platforms we track take several positions: stronger no-rehypothecation language or architecture (Unchained, Figure, Arch Lending, Lava, and Xapo), Open Book plus funding-partner exposure (Ledn), broader collateral-use risk disclosure (SALT), incomplete public collateral-reuse documentation (Strike), account- or form-dependent collateral terms (Nexo and YouHodler), and undisclosed. Always ask directly if rehypothecation policy is not stated clearly on the platform's website and in the loan agreement.
Why BTC-backed loans specifically
Bitcoin is the dominant collateral asset for crypto lending because it combines four properties that no other asset matches: institutional-grade custody infrastructure, deep liquidity for liquidation, regulatory recognition, and a long track record of value preservation. In the tracked product set we compare on Pledge, the mainstream CeFi loans are modeled as BTC-only. The clearest non-BTC collateral paths in our dataset are DeFi workflows like Aave and MakerDAO, which come with different smart-contract and self-custody trade-offs.
For borrowers, this means: if you hold BTC, you have maximum flexibility and best rates. If you hold ETH or altcoins, you have fewer options and will likely face lower LTV caps and higher rates to compensate lenders for the additional risk.
Further Reading
CeFi vs DeFi Lending
A detailed comparison of centralized and decentralized crypto lending — risks, rates, and when each makes sense.
Custody Models Explained
What happens to your BTC when you hand it over — custodial, multi-sig, and non-custodial models compared.
Platform Collapses: What Happens to Your BTC?
Lessons from Celsius, Voyager, and FTX — and how custody models determined who recovered funds.
See custody models and rehypothecation policies side by side
Every platform in our tracked dataset is scored on custody model, rehypothecation policy, and reserve transparency.
Compare platforms →
Key Takeaways
- 01 Crypto-collateralized loans use your digital assets as security without requiring a sale — the core benefit is tax deferral and continued exposure to crypto appreciation.
- 02 BTC dominates the market because of institutional trust, liquidation depth, and regulatory recognition — once you move beyond BTC, you typically face lower LTVs or a DeFi-style workflow with more operational complexity.
- 03 CeFi vs DeFi creates fundamentally different risk profiles: CeFi has counterparty risk but legal recourse; DeFi eliminates counterparty risk but introduces smart contract risk with no legal recourse.
- 04 Rehypothecation — platforms lending your collateral to third parties — is the primary mechanism by which customer funds are lost. Always confirm a platform's rehypothecation policy before signing.