What Is Crypto Lending?

What Is Crypto Lending?#

Crypto lending is the practice of lending digital assets to borrowers in exchange for interest. In decentralized finance (DeFi), this happens through smart contracts on a blockchain. There are no loan officers, credit checks or paperwork. Anyone with a wallet can take part.

There are two sides to every market:

• Suppliers (lenders)** deposit an asset, such as USDC or ETH, and earn interest.
• Borrowers** lock up collateral, such as ETH or wBTC, and borrow another asset against it. They pay interest on the loan.

Because the lender can't judge a borrower's identity or credit history, the loan is protected by collateralCollateralThe asset a borrower locks to secure a loan. and code instead. That is why nearly all DeFi loans are overcollateralized.

DeFi lending vs CeFi lending

How DeFi Lending Works, Step by Step#

Every lending market runs the same four-step loop:

An oracleOracleThe price feed the market uses to value assets. (a price feed) tells the contract what the collateral and loan assets are worth. The quality of that feed matters a great deal, which is why it appears again in the risks section.

Key Lending Terms in Plain English#

How Lending Rates Are Set: Utilization and the Rate Curve#

Most lending markets set their rate automatically based on utilizationUtilizationBorrowed ÷ supplied. At 80%, four-fifths of the deposits are on loan..

• Low utilization:** plenty of idle cash, so borrowing is cheap and suppliers earn little.
• High utilization:** cash is scarce, so rates climb to attract new deposits and push borrowers to repay.
• The kink:** many rate models steepen sharply past a target utilization. Morpho markets commonly use a model that steers utilization toward a target level; Aave-style models use a defined kink.

Why suppliers earn less than borrowers pay: supply APY is roughly the borrow APY multiplied by utilizationUtilizationBorrowed ÷ supplied. At 80%, four-fifths of the deposits are on loan. (minus any protocol fee). If only half the pool is borrowed, suppliers earn about half of what borrowers pay.

A Worked Example (Illustrative Numbers)#

All numbers below are examples, not live rates or advice.

The borrower

• Alice** deposits $10,000 of ETH as collateral in a market with an 86% LLTV.
• She borrows** $6,000 of USDC. Her LTV is 60%.
• Her health ratio** is LLTV ÷ LTV = 86 ÷ 60 ≈ 1.43.
• Liquidation** becomes possible when her debt is 86% of her collateral. That is when the collateral falls to about $6,977, roughly a 30% drop from $10,000.
• At $8,000 borrowed** the same math puts liquidation after only about a 7% drop. A larger loan means a smaller safety cushion.

The supplier

Bob supplies $5,000 USDC at a 5% supply APY. If the rate stayed constant, he would earn about $250 over a year. In practice the rate moves daily, so the real figure will differ.

Variable Rates vs Fixed Rates#

How fixed rates are priced: fixed-rate positions typically trade at a discount to their redemption value. The gap between the price paid and the amount repaid at maturity is the locked-in yield.

Who uses fixed rates: traders running strategies where funding cost must be predictable (such as basis trades) and anyone building structured products. A fixed loan ends at its maturityMaturityThe end date of a fixed-rate loan..

Pooled Lending vs Isolated Markets and Vaults#

DeFi lending protocols are built in different ways. Two common designs:

In Morpho, a market is defined by its loan asset, collateral asset, oracle, LLTV and interest rate model. Most suppliers don't pick markets themselves. They deposit into a vaultVault / curatorA vault pools supplier funds; a curator chooses the markets. and a curator allocates the funds across several markets. Curators typically charge a performance fee on the yield.

Aave takes a different route: assets sit in a large shared pool per deployment, and health factorHealth factorAave's safety number: above 1 is safe, below 1 is liquidatable. is the number borrowers watch. Aave reports two limits rather than one — maxLTV caps how much you may borrow, and the slightly higher liquidation threshold is where liquidation actually triggers. Morpho collapses both into a single LLTV.

Where to look on CoinDuck: Morpho markets · Aave

Risks of Crypto Lending and How to Reduce Them#

How to Read Lending Data on CoinDuck#

These are the numbers that move as you use the markets above. The tables underneath are live, not examples.

Questions you can answer with CoinDuck

• Which markets have the highest utilization right now?
• Where is supply growing or shrinking fastest?
• How do fixed rates compare with variable rates for the same asset?

What People Use Crypto Lending For#

• Earning yield on idle assets.** Stablecoin and ETH holders supply to markets or vaults.
• Borrowing without selling.** Holders access cash while keeping their exposure to the collateral.
• Predictable funding.** Fixed rates support strategies that need a known cost, such as basis trades.
• Treasury management.** DAOs and funds put reserves to work.
• Market signals for analysts.** Lending data shows where capital is moving and how much leverage is in the system.

Before You Supply or Borrow: A Checklist#

Educational, not advice.

If you supply

• I know which asset I'm supplying and how it's backed
• I've checked utilization and whether I can withdraw easily
• I understand the protocol or vault, including who the curator is
• I'm not relying on today's APY staying the same
• I'm not putting all my funds in one market

If you borrow

• I know my LTV, the LLTV and my liquidation price
• I've left a large safety margin below the LLTV
• I know what happens if the price drops overnight
• I understand the oracle the market uses
• I have a plan to add collateral or repay quickly

Frequently Asked Questions#

Keep Learning#