In every institutional credit memo, there is one question that determines everything else: what happens to the collateral if the lender fails?
In private credit, the answer is usually detailed across 50 pages: lien priority, UCC filings, guarantor structures, cross-default provisions. In BTC lending, most borrowers never ask it. They look at the APR, maybe the LTV, and sign up.
The question
"If this platform fails tomorrow, what is my legal status as a claimant?"
The answer depends entirely on the custody model. And the custody model determines everything about your risk.
What the answers actually look like
Custodial platform fails (e.g., a Celsius scenario): You are an unsecured creditor. You wait in line with everyone else. You might get 30-70 cents on the dollar, years later, after legal fees. Celsius customers are still waiting.
Multi-sig platform fails (Unchained scenario): You hold 2 of 3 keys. Unchained cannot move your BTC without you. The platform failing doesn't mean you lose your BTC — you can move it yourself with your co-signers.
Non-custodial protocol fails (DeFi scenario): The smart contract still holds your BTC. If the front-end disappears, the contract doesn't care. You can interact with it directly. There is no "platform" to fail in the traditional sense.
The trade-off nobody talks about
Custodial platforms offer KYC, institutional custody partners, customer support, and regulated structures. Multi-sig offers better legal ownership without giving up all the conveniences. Non-custodial eliminates counterparty risk but introduces smart contract risk and no recourse if you make a mistake. Our custody models guide breaks down each approach in detail.
None of these are wrong choices. But you should make the choice consciously — not by default because you didn't know to ask. Use our comparison tool to see custody models for every platform side by side.