What Is Crypto Lending And How Does It Work?
Crypto lending is a way to generate passive income with your crypto by lending it to other users on a blockchain network, such as Bitcoin and Ethereum. In return for lending out your cryptocurrencies, you receive an interest rate that the borrower must pay. It’s similar to lending out fiat money, like euros, in exchange for interest — for example, through a bank — but in this case, you do it with crypto. Also, you don’t lend through a bank, but through a crypto lending platform, such as DEX .
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🕒 9:51 PM
📅 Nov 29, 2025
✍️ By chrison2
📍Key Takeaways•Crypto lending provides passive income by lending your crypto to other users via CeFi or DeFi platforms in exchange for interest.
•In DeFi lending, you deposit your crypto into a liquidity pool for interest. In CeFi, you rely on a central party that manages the terms.
•Crypto lending comes with risks such as market volatility, platform bankruptcy, smart contract bugs, and liquidity issues.
•Lending is about borrowing and lending assets, while staking is focused on network security. Lending may offer higher returns but also carries more risk.
📍How does crypto lending work?
Crypto lending works by lending out your crypto on a platform that offers lending. You visit such a platform and indicate that you want to lend out your crypto to other users. There are both decentralized and centralized options. Both provide the infrastructure to lend crypto using blockchain technology.
•Lending through a decentralized platform (DeFi)
With decentralized finance platforms (DeFi), the lending process is managed by smart contracts. As a lender, you deposit your crypto into a liquidity pool. Borrowers can then borrow crypto from that pool at a variable interest rate, which is paid to the lender. The repayment terms and rates are defined in the smart contract.
Borrowers must provide collateral to secure the loan. The amount of collateral required depends on the platform and especially on the volatility of the asset. For example, you’ll need less collateral for Ethereum than for a small, highly volatile coin. The least collateral is required for stablecoins, like USDC. Across all platforms, you must at least deposit collateral equal to the amount you wish to borrow.
Collateral requirements are shown using LTV (Loan-to-Value) or collateral ratio. LTV is expressed as a percentage (e.g. 50%), while the collateral ratio is expressed as a number.
Example:
LTV of 50% → means: you can borrow €500 with €1,000 in collateral.
That equals a collateral ratio of 2 (or 200%) — you need double the amount as collateral to borrow the funds.
Practical example:
Someone wants to borrow 1,000 USDC.
They lock 1.5x the value (e.g. €1,500 in USDC, ETH or fiat) as collateral.
•Lending through a centralized platform (CeFi)
There are also centralized platforms that offer crypto lending. These don’t use smart contracts. Instead, the platform itself — the company behind it — manages the lending process. They determine interest rates, collateral requirements, and lending terms. They also decide who receives loans. The platform pays you a predetermined interest rate (though this may still vary).
Borrowers must also deposit collateral (e.g. BTC or ETH). The platform verifies whether it’s sufficient. If prices drop significantly, collateral may be partially sold off (liquidated).
As a lender, you place your trust in a company, unlike DeFi where everything is transparent on the blockchain.
A major advantage of CeFi is its user-friendliness and accessibility for beginners. The downside is that you lose control over your crypto and are at risk if the platform goes bankrupt or gets hacked.