Can you get a loan using crypto as collateral?

How Crypto-Backed Loans Work

1. Borrowers deposit supported digital assets into a smart contract or custodial wallet managed by a lending platform.

2. The platform assesses the collateral’s market value and applies a loan-to-value (LTV) ratio, typically between 30% and 70%.

3. Users receive fiat or stablecoin loans instantly, without credit checks or traditional KYC in many decentralized protocols.

4. Interest accrues continuously, often at variable or fixed annual percentage rates published on-chain or via platform dashboards.

5. If the collateral value drops below a maintenance threshold, borrowers must add more crypto or repay part of the loan to avoid liquidation.

Major Platforms Offering Collateralized Lending

1. Aave allows users to supply ETH, WBTC, DAI, and other tokens to earn yield while borrowing against them using permissionless pools.

2. Compound enables real-time interest rate adjustments based on supply and demand for each asset pair, with automatic rebalancing.

3. MakerDAO uses the DAI stablecoin system where users lock ETH or other approved assets in vaults to generate DAI through overcollateralization.

4. Celsius Network (prior to insolvency) offered centralized custody with fixed-rate terms and multi-currency disbursement options.

5. Nexo provides instant credit lines with flexible repayment windows and supports over 20 cryptocurrencies including BTC, ETH, and XRP.

Risks Inherent to Crypto-Collateral Loans

1. Price volatility can trigger sudden liquidations, especially during flash crashes where oracle feeds lag behind actual market conditions.

2. Smart contract exploits have led to losses exceeding $100 million across multiple DeFi protocols in recent years.

3. Centralized lenders may freeze withdrawals or impose withdrawal limits during periods of regulatory scrutiny or solvency stress.

4. Regulatory uncertainty persists in jurisdictions like the U.S., where the SEC has challenged whether certain lending products constitute unregistered securities.

5. Cross-chain bridges used for collateral transfers introduce additional attack surfaces, as demonstrated by repeated exploits targeting multichain infrastructure.

Collateral Requirements and Asset Eligibility

1. Bitcoin and Ethereum remain the most widely accepted assets due to high liquidity and established price oracles.

2. Altcoins face stricter requirements—many platforms only accept tokens with proven on-chain volume, minimum market cap thresholds, and audited token contracts.

3. Some protocols require staked assets like stETH or rETH to be whitelisted separately, adding complexity to collateral composition.

4. Tokens subject to heavy concentration risk—such as those held predominantly by a few addresses—are frequently excluded from eligibility lists.

5. Stablecoins used as collateral are often limited to overcollateralized variants like DAI or USDC, while algorithmic stablecoins like UST were delisted after depegging events.

Frequently Asked Questions

Q: Can I borrow against NFTs?A: Yes, niche platforms like NFTfi and BendDAO allow users to pledge ERC-721 assets as collateral, though loan sizes remain small and liquidation mechanics differ significantly from fungible token lending.

Q: What happens if my collateral gets hacked from the lending platform?A: Losses depend on custody model—decentralized protocols generally offer no recourse, while centralized entities may absorb losses partially or not at all, as seen in cases involving Voyager and BlockFi.

Q: Are interest payments taxed as income in major jurisdictions?A: In the U.S., accrued interest is treated as ordinary income upon receipt; in Germany, private sale rules may apply depending on holding period and frequency of transactions.

Q: Do I need to report the loan on my tax return even if I don’t sell the borrowed funds?A: Yes, most tax authorities consider the receipt of fiat or stablecoin proceeds a taxable event only upon conversion or spending—not at disbursement—but tracking cost basis remains mandatory for future disposal.