How crypto lending works, plus common types and platforms

Crypto loans have never been more popular, hitting a record of $73.59 billion in late 2025. For both lenders and borrowers, digital assets are beneficial because they’re accessible and transparent – but they also present challenges like price volatility and platform risks.

In this article, we’ll explain how crypto lending differs from traditional loans, including the legal and tax implications. We’ll also cover some of the best crypto lending platforms, so you can make an informed decision about where to get started.

Crypto loans explained

Crypto lending is a financial arrangement where two parties agree to send and receive digital assets. On one side is the lender, who deposits their cryptocurrency at a lending platform to receive interest.

A borrower then takes out crypto using collateral, and pays off the loan plus interest over time. And the lending platform manages interest rates and monitors payments and collateral requirements, typically via a centralized entity or an intermediary-free smart contract.

How does crypto lending work?

Crypto lending platforms bring together lenders who want interest with borrowers who want liquidity. Once a lender deposits their crypto, it’s available to any borrower who agrees to the loan’s terms.

Most crypto loans use overcollateralization, which means the borrower has to deposit a higher value of crypto than the amount they want to take out. This provides a wide buffer zone that accounts for the crypto market’s price volatility.

If a borrower pays all their principal and interest on time, and their collateral remains above the required minimum, they get their deposit back. When these conditions aren’t met, borrowers can face liquidation, where the platform claims and sells their collateral.

Common types of crypto loans

Lenders and borrowers have similar obligations across all crypto loan platforms, but the details vary based on who (if anyone) manages the loan. Here are the two basic types of collateral-based crypto loans.

Centralized finance (CeFi) loans

When a company, financial institution, or centralized exchange (CEX) offers crypto loans, those loans fall under the CeFi category. Lenders and borrowers have to create accounts on the centralized platform, which includes sharing know-your-customer details. The CeFi loan platform sets the interest rates and collateral ratios, and is responsible for enforcing loan terms and securing funds.

Decentralized finance (DeFi) loans

DeFi is an ecosystem of financial services built on blockchains, and it includes decentralized applications (dApps) that focus on crypto loans. These DeFi lending sites let anyone with compatible self-custodial wallets and currencies deposit their assets for interest or withdraw crypto by posting the required collateral. Automated smart contract commands manage each loan, transfer funds between wallets, and enforce rules like liquidation.

How are crypto loans taxed?

The tax rules for crypto loans aren’t usually explicit, and what policies apply will vary based on region and situation. In the United States, since the IRS treats cryptocurrency as property, crypto loan transactions are most likely to be considered capital gains and losses.

When borrowers repay their loans in crypto or face liquidation or default, these activities are technically sales. So they’ll count as capital gains if the average price of the cryptocurrency (cost basis) was lower than the fair market value (FMV) at time of sale. Taking out the loan might also be a taxable event if the lending platform sends cryptocurrency as a receipt.

From the lender's perspective, the IRS might treat sending crypto to a lending protocol as a taxable disposal. This is more likely when the protocol issues a new lending coin for the transfer, such as a liquidity provider token. Lenders also have to compile the FMVs for any crypto interest rewards and report those as taxable income. The FMV serves as the cost basis for calculating capital gains or losses on future disposals.

4 crypto lending platforms

There’s a growing list of reputable companies and protocols that offer crypto lending – these are four of the most popular and influential options.

1. Nexo

Nexo was a pioneer in centralized crypto lending, and it currently offers a Credit Line service for digital assets that doesn’t run credit checks. Since its launch in 2018, this global company has become a full-service platform with dozens of features, such as a built-in exchange and crypto credit cards.

2. Aave

Aave is one of the largest DeFi crypto lending protocols, with billions of dollars in locked assets. The Aave dApp works on more than a dozen blockchains, and it offers many distinctive features like flash loans, variable or stable interest rates, and a staking protocol for its Aave (AAVE) governance token.

3. Compound

Compound was one of the earliest DeFi lending sites for the Ethereum blockchain, and it now offers over $1 billion in crypto liquidity in nearly 30 markets. One of Compound’s most significant contributions to crypto history was launching the Compound (COMP) governance token as a reward, which popularized the concept of liquidity mining.

4. Coinbase

In 2025, Coinbase announced an integration with the decentralized lending protocol Morpho to offer on-chain crypto-backed loans. U.S. clients (excluding New York residents) with accounts on this CEX can now withdraw up to $5 million in the stablecoin USDC.

Risks of crypto lending

Since this service is so new, anyone who wants to loan Bitcoin (BTC) or other cryptocurrencies should know what challenges these financial agreements involve.

Lack of legal clarity

Some jurisdictions haven’t caught up with advances in Web3 and introduced laws specific to crypto loans. The current lack of legal guidance creates uncertainty about the responsibilities of borrowers, lenders, and platform operators during events like insolvency.

Volatility and margin calls

Crypto’s natural price swings mean a borrower’s collateral can fall below the required threshold during a market downturn. This triggers a margin call where the borrower has to add more collateral or repay their loan to avoid liquidation.

Platform and insolvency risks

If a lending platform mishandles funds or neglects proper risk management, it may not have enough crypto to repay its clients' debts. In 2022, many now-bankrupt crypto lending companies, including BlockFi, Celsius, and Voyager, froze customer funds for this reason.

Rehypothecation risk

One way lending platforms can mismanage user funds is through rehypothecation, or reusing deposited crypto for their own loan deals to generate more yield. When those additional borrowers default or there’s intense market stress, lending companies are more likely to face insolvency.

How crypto lending compares to traditional loans

Loans for cryptocurrency borrow the basic structure of traditional lending, with CeFi platforms and DeFi protocols altering some aspects to make it better for the blockchain environment. These distinctions make crypto lending a unique process:

• Greater speed and accessibility: Loans of Bitcoin and other crypto don’t go through as rigorous an approval process as traditional loans, which makes them faster to process. Plus, people who want to lend or borrow crypto only need assets, crypto wallets, and internet access, so these loans are widely accessible.
• Different collateral and credit criteria: With traditional loans, borrowers need to provide details such as their credit scores and income. Crypto lending relies on overcollateralization, which eliminates credit checks but also means borrowers need more crypto than they intend to take out.
• Higher risk profile: Because traditional loans operate in a more regulated environment, they don’t carry as many risks. With crypto loans, there’s a greater risk of issues like smart contract hacks and price volatility.
• Unclear tax implications: Tax rules about interest payments and income from traditional loans are far better defined, and crypto lenders and borrowers can face multiple capital gains taxes when transferring their digital assets.

Manage your lending transactions with CoinTracker

When lending cryptocurrency, every transaction has potential tax implications, and crypto investors need clear trails showing each transfer and token reward to remain compliant. CoinTracker makes this task easier by linking to hundreds of crypto wallets and exchanges, as well as thousands of smart contracts on DeFi protocols. Our Portfolio Tracker records every move, so you can easily categorize crypto loan activity and export it to IRS-ready forms.

Worried about reporting your crypto taxes? CoinTracker makes it simple. Join over three million users who trust us for hassle-free tax reporting. Start for free today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.