Crypto-Backed Loans: Collateral, Loan-to-Value, and Liquidation Risk
Summary
The document explains how crypto-backed borrowing works: a borrower pledges digital assets, selects a loan amount and terms, receives cash or crypto, then repays to release the collateral. It introduces loan-to-value (LTV) as the relationship between borrowed funds and collateral value, and gives an example showing that a higher LTV permits more borrowing while leaving less room for price declines. If collateral falls enough, a lender may request additional collateral or repayment, then liquidate assets if the borrower does not respond.
It compares centralized lending platforms with DeFi loans on custody, identity checks, speed, rates, and insurance, and discusses provider due diligence, proof of reserves, security, and regional restrictions. It also describes borrowing as potentially avoiding an asset sale, while acknowledging that tax treatment varies and liquidation can have tax consequences. Much of the guide promotes one named exchange and includes time-sensitive platform rates, features, and testimonials; these claims are not independently substantiated and should not be treated as general market terms.
Key ideas
- Borrowers can obtain liquidity by pledging crypto rather than selling it.
- A higher loan-to-value ratio increases borrowing capacity but raises liquidation risk when collateral prices fall.
- Lenders may liquidate collateral if a borrower fails to meet margin or repayment requirements.
- Centralized and DeFi lending differ in custody, KYC, speed, rates, and insurance availability.
- Tax treatment, platform terms, and access depend on jurisdiction and provider.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.