Of course I have come across the concept of crypto lending, which by implication means crypto borrowing by clients, but the whole concept has always been an enigma to me. Maybe I am just a simple creature, but the truth is that I have never bought anything with crypto and therefore only ever taken loans (most notably a mortgage) out in FIAT. It was with this puzzlement, before I move on to Celsius next time, that I will try to grapple with my thoughts.

Please always DYOR. Some commentators have noticed recently that there have been some inaccuracies in my posts, especially concerning former P0x tokens and it is why I actually didn't follow through and do AmpleForth. Any mistakes are unintentional and of course mine, but an article is only as good as the research that goes into it. So please exercise caution and feel free to call me out as it keeps me humble and accountable.

Crypto borrowing means taking out a loan in cryptocurrency—usually StableCoins—by locking up your own crypto as collateral. It works through either on centralised platforms or decentralised smart‑contract protocols, and borrowers typically overcollateralise to protect lenders. People borrow crypto to access liquidity without selling assets, avoid taxable events, or increase leverage.

So how does it work?

Crypto is deposited as collateral and another asset—often USDC, USDT, DAI, or another StableCoin — is lent. However, unlike traditional finance, where you might borrow more than your collateral, crypto borrowing is over-collateralised. In other words the value of the collateral exceeds the loan amount. For example somebody looking to borrow $1,000 may need >$1,500 in other assets which are then locked up. This protects lenders and ensures the system remains solvent.

Honestly I almost wish I hadn't started this it sounds a lot like pawning tbh.

Anyway, back to the point. It seems that crypto borrowing exists in two environments. Firstly a centralised approach, in which platforms such as Nexo or Ledn manage everything for you, in that they hold your collateral, set interest rates and handle liquidations. Alternatively a decentralised approach can be taken. Within this environment utilising protocols such as Aave or Compound smart contracts are used to automate collateral deposits, borrowing, interest rate adjustments and liquidations. With the latter approach there is no human intermediary as everything is on‑chain.

Typically the borrowing process works like this. Firstly, the borrower deposits collateral (e.g. ETH) and then borrows, as outlined above a percentage of its value using a Loan‑to‑Value ratio. Then as with any loan, interest is paid over the length of the loan period before the loan is finally repaid to unlock the collateral and restore it to the borrower. The biggest single risk concerns if the collateral value drops too much, the protocol may liquidate it automatically to protect lenders.

Sounds even more messed up. Why, oh why, did I start this. Anyway to carry on...

So given the dynamics why would anybody even consider borrowing crypto?

Broadly speaking there are four reasons why

Firstly, it appeals to long‑term hodlers who need liquidity, in other words those who believe their crypto will rise in value but need cash now. In borrowing they avoid selling  and thus avoid capital gains tax (in some jurisdictions) and at the same time their collateral remains exposed (and ultimately theirs) to take advantage of any future price increases.

This makes sense to me as I sometimes lack liquidity for further trades, but at the same time is the risk exposure worth it. Experience has taught me caution.

Secondly, it provides borrowers with leverage, the process of using StableCoins can reap high rewards but as with everything that promises high rewards there comes greater risk and it all comes down to the price of the coin they invest in. Remember more seem to fail than succeed.

Thirdly, it appeals to institutions who employ arbitrage strategies (the simultaneous buying and selling assets in different markets to profit from temporary price discrepancies, aiming for nearly risk-free profit) and it naturally follows that with this they are also looking at short‑selling and hedging as part of their overall plan

Finally, some may borrow to participate in yield‑generating strategies across DeFi.

Honestly it all sounds very dodgy to me. I can kind of buy into the first reason (the only one I provided an additional comment on - see above), but the risks are too high. The drop in collateral value can be devastating if you get it wrong. A borrower needs to be extremely careful and show shrewd judgement as to which coin to lock up with the lender before proceeding. Such loans may also come with volatile interest rates and of course there needs to be some consideration to the security envionment of the lending platform which may be exposed to failures, hacks and smart contract bugs.

Honestly it doesn't sound very appealing does it? I guess it works if you get it right, but at what risk and what cost to your mental well-being?

Anyway, this article and the previous article (about the lending model retail banking uses) have all been preparation for what is coming tomorrow.

As always stay safe and well my friends.