What Happens to Your Bitcoin When You Take a Loan?

BetterLending Research Desk · Collateral Custody & Bitcoin Loan Mechanics · Updated May 2026

Direct answer:

When a borrower takes a Bitcoin-backed loan, the BTC is transferred to a platform-controlled or jointly controlled wallet address — removing the borrower's direct on-chain control for the duration of the loan. Who controls it, how it is stored, whether it can be reused, and under what conditions it can be liquidated are determined entirely by the platform's custody model. These structural decisions — not the interest rate — determine whether the Bitcoin is safe during a market correction and whether it is returned in full when the loan is repaid.

Introduction

Most Bitcoin holders who explore crypto-backed borrowing understand the concept — pledge BTC, receive liquidity, repay and get the BTC back — but very few have mapped what actually happens to the collateral after it leaves their wallet: which entity controls the private keys, whether the Bitcoin can be reused for other purposes, how LTV is monitored in real time, and what rights the lender holds when the market moves against the position. Those operational details are not administrative footnotes. They are the primary variables that determine whether a Bitcoin-backed loan is a safe, structured liquidity instrument or an arrangement with hidden exposure to platform failure, counterparty chain collapse, or automated liquidation with no warning window.

Learn

Borrow Against Bitcoin: How Bitcoin-Backed Loans Work, What the Risks Are, and How to Survive the Market

What Actually Happens When Bitcoin Is Deposited as Collateral

The collateral deposit is the moment at which the borrower transitions from holder to borrower — and from direct cryptographic control to contractual claim. Every step that follows is governed by the platform's custody architecture, not by the loan agreement headline terms.

Step 1: Private Key Transfer

The borrower sends BTC to a wallet address provided by the platform. The moment the transaction is confirmed on-chain, the private keys to that address belong to whoever the platform designates — the platform itself, an institutional custodian (such as BitGo), or a multi-party multi-signature arrangement. The borrower now holds a contractual right to the collateral, not a cryptographic one. Recovering BTC in a dispute or insolvency requires exercising legal rights — not signing a transaction.

Step 2: Custody Assignment and Wallet Architecture

The receiving wallet's architecture determines the collateral's security profile. In a full-custody CeFi model (BetterLending, Ledn Custodied, CoinRabbit), the platform or its custodian holds the private keys in segregated cold storage — the Bitcoin sits in a dedicated address assigned to the borrower's position. In a collaborative-custody model (Unchained Capital), the borrower holds one of three keys in a 2-of-3 multi-signature address — no transaction, including liquidation, can proceed without two of three signatures. In a DeFi model (Aave, Coinbase via Morpho), the BTC is transferred to a smart contract; the code governs custody, liquidation, and release.

Step 3: LTV Initialisation and Continuous Monitoring

The platform calculates starting LTV — loan balance divided by collateral value — at the time of deposit confirmation. From that moment, the LTV is recalculated in real time against live market price feeds. A borrower entering at 50% LTV with 1 BTC at $80,000 against a $40,000 loan is not at 50% LTV the following week if BTC has moved. The ratio is live, not static. All threshold comparisons — margin call warnings and liquidation triggers — are made against this continuously updated number.

Step 4: Collateral Registration and Loan Issuance

Once the deposit is verified on-chain, the loan is issued — typically within minutes in DeFi and smart-contract CeFi environments, and within 2 hours in CeFi platforms like BetterLending and APX Lending. The loan amount, interest rate, term, margin call threshold, and liquidation threshold are recorded at origination. These parameters determine the entire subsequent lifecycle of the position.

Step 5: Lender Rights Become Active

From the moment the loan is issued, the lender holds the legal right to liquidate the collateral if defined conditions are met — typically a margin call at 75–85% LTV followed by automated or structured liquidation at 85–90% LTV. In full-custody CeFi, this right requires only the platform's action. In collaborative custody (Unchained), two of three key holders must sign — Unchained and its key agent can proceed without the borrower's signature if the borrower is unresponsive. In DeFi (Aave, Morpho), the smart contract executes liquidation without any human authorisation when the health factor threshold is breached.

Who Controls the Bitcoin After Deposit?

The question of control has three distinct dimensions — and conflating them is the most common source of misunderstanding among borrowers evaluating platforms.

Legal Ownership

The borrower retains legal title to the BTC throughout the loan — they own the asset and have a contractual right to its return on repayment. This legal ownership is the basis on which a crypto-backed loan is treated as non-taxable in most jurisdictions: no disposal of property has occurred. However, legal ownership does not guarantee operational control or access during the loan term.

Operational Control

Operational control — the ability to move the BTC on-chain — rests with whoever holds the private keys. In full CeFi custody, that is the platform or its institutional custodian (BitGo, Coinbase Custody, or equivalent). The borrower cannot move the collateral, add to it without platform instruction, or access it during the loan term without platform cooperation. In Unchained's 2-of-3 multisig model, the borrower holds one key — they can verify the collateral balance on-chain using a hardware wallet at any time, but cannot move it unilaterally. In DeFi, a smart contract holds custody — no human entity controls it, but the code can execute liquidation automatically.

Liquidation Authority

Liquidation authority is the most operationally critical dimension. In full CeFi custody with an automated liquidation engine (Nexo, YouHodler), the platform can sell the collateral at threshold without any delay, notification, or borrower input — the decision is algorithmic. In CeFi with a structured notification window (BetterLending, Ledn, APX Lending), a margin call notification is issued before execution, giving the borrower a defined window to respond. In Unchained's collaborative custody model, even liquidation requires a 2-of-3 signature — structurally limiting unilateral platform action. In DeFi (Aave, Morpho), the smart contract executes liquidation without human authorisation the moment the health factor breaches the threshold, and the liquidation is executed by third-party liquidators who receive a bonus for the service.

Understanding these three dimensions — legal ownership, operational control, and liquidation authority — is the analytical starting point for evaluating any Bitcoin-backed lending platform. Exploring how Bitcoin-backed loans actually work in depth requires understanding all three, not just the headline LTV and rate terms.

Segregated Custody vs Pooled Custody

The architectural distinction between segregated and pooled custody is the single most consequential structural decision in a crypto-backed lending arrangement — and the one most consistently overlooked by borrowers evaluating platforms on rate and LTV alone.

Segregated Custody

In a segregated custody model, each borrower's collateral is held in a dedicated wallet address — individually identifiable on the blockchain, legally ring-fenced from the platform's operational funds, and separated from all other borrowers' collateral. If the platform becomes insolvent, the segregated collateral is identifiable as belonging to the specific borrower and legally protected from absorption into the general bankruptcy estate. The borrower is a secured creditor with a specific, traceable asset — not a general unsecured claimant. BetterLending, APX Lending (both via BitGo), Ledn (Custodied product), CoinRabbit (multisig cold wallets), and Unchained (2-of-3 multisig) all operate segregated models in their respective structures.

Pooled Custody

In a pooled custody model, borrower collateral is co-mingled in accounts the platform controls as a single operational pool. Individual borrowers have no on-chain visibility into their specific collateral position — the pool balance may be verified, but the individual allocation cannot. In an insolvency scenario, the pool becomes part of the bankruptcy estate. Borrowers must file claims through legal proceedings rather than recovering specific assets, and recoveries are distributed pro-rata across all pool participants — not in full to the individual depositor. The 2022 lender collapses — Celsius, BlockFi, Voyager — all operated structures in which client assets were co-mingled with operational funds, producing the outcome that turned technically secured borrowers into general unsecured creditors.

Key principle: Segregated custody does not eliminate platform risk — it determines what happens to the borrower's collateral when platform risk materialises. Segregation converts a worst-case scenario from total loss to a defined, recoverable position.

What Is Rehypothecation — and Why It Creates a Second Risk Layer

Rehypothecation is the practice of reusing pledged collateral for the platform's own financial purposes — lending it to institutional counterparties, posting it as margin on other positions, or deploying it into yield strategies. From the lender's perspective, it is a revenue mechanism: a platform holding $500 million in borrower collateral can earn 4–8% annually by deploying that collateral elsewhere, generating income that can be used to subsidise lower interest rates. From the borrower's perspective, it introduces a second failure mode entirely independent of BTC price.

The critical risk is chain fragility. When a platform rehypothecates BTC to Institution A, which uses it as margin at Exchange B, three counterparty links now connect the borrower's collateral to its intended location. Any single link breaking — Institution A facing a margin call, Exchange B freezing withdrawals, or the lending platform itself experiencing a liquidity crisis — cascades back to the borrower. The BTC may be inaccessible regardless of the LTV ratio and regardless of whether the loan itself is in good standing.

As Unchained Capital has documented in its own lending principles: because their 2-of-3 multisig model requires the borrower's key for any transaction, Unchained is structurally unable to rehypothecate collateral — the architecture prevents it regardless of intent. BetterLending and APX Lending prohibit rehypothecation by policy and enforce it through segregated wallet architecture. CoinRabbit maintains a stated no-rehypothecation policy with collateral held in multisig cold wallets. Ledn's Custodied Loan product excludes rehypothecation; its Standard Loan product explicitly allows it and discloses this monthly in its Open Book Report. Nexo's rehypothecation policy requires direct confirmation. YouHodler does not publish a non-rehypothecation guarantee for its lending products.

The 2022 collapse cycle validated exactly this risk at scale. Celsius, BlockFi, and Genesis all operated rehypothecation-adjacent structures. When market stress hit multiple counterparties simultaneously, the chains broke — and borrowers whose positions were technically at safe LTV levels discovered their collateral was frozen in bankruptcy proceedings that took 18–36 months to resolve.

What Rights Does the Lender Have Over the Collateral?

The lender's rights are defined at origination and become exercisable under specific, measurable conditions. Understanding these rights is not pessimistic risk management — it is the borrower's framework for knowing exactly when and how intervention is possible.

Margin Call Rights

When LTV rises to the margin call threshold — typically 75–85% depending on the platform — the lender has the right to issue a formal notice requiring the borrower to restore LTV to an acceptable level. The borrower can respond by adding collateral (depositing more BTC or fiat), repaying partial principal, or closing the position. The notification window before liquidation is platform-specific: BetterLending and Ledn provide defined notice periods; Aave and Coinbase/Morpho execute liquidation as soon as the health factor threshold is breached without a fixed grace period.

Liquidation Rights

At the liquidation threshold — typically 85–90% LTV in CeFi, or the smart contract's health factor threshold in DeFi — the lender has the right to sell the collateral to recover the outstanding loan balance. In full-custody CeFi, this execution is unilateral and automatic. In Unchained's collaborative model, it requires 2-of-3 signatures but can proceed without the borrower's key if the borrower is unresponsive. In Aave, third-party liquidators execute the liquidation in exchange for a liquidation bonus (typically 4–10% of the collateral) — the borrower loses this bonus amount on top of the loan recovery.

Default and Seizure Conditions

Beyond LTV-triggered liquidation, most loan agreements include default clauses covering non-payment of interest, breach of AML/KYC requirements, or material misrepresentation in the application. Default gives the lender broader rights over the collateral — including seizure without the LTV threshold being met. These clauses are platform-specific and should be confirmed before signing.

What Happens During a Market Crash: Three Scenarios

Starting Position (All Three Scenarios)

Collateral: 1 BTC at $80,000
Margin call threshold: 80% LTV
Liquidation threshold: 90% LTV

Scenario A — Conservative Entry (47% LTV — BetterLending average)

Loan: $37,600 USDT | BTC drops 40% → $48,000

LTV at new price: $37,600 / $48,000 = 78.3% — below the 80% margin call threshold. No forced action. Borrower still holds the position. With a further 20% reserve in stablecoin, they add collateral at this point, dropping LTV to ~66%. When BTC recovers, collateral is returned in full on repayment.

Scenario B — Aggressive Entry (75% LTV)

Loan: $60,000 USDT | BTC drops 12% → $70,400

LTV at new price: $60,000 / $70,400 = 85.2% — past the margin call threshold, approaching liquidation. A further 5.6% decline pushes LTV to 90%. On an automated platform, liquidation may execute before the borrower can respond — particularly if the move happens overnight or on a weekend. Position closed. Collateral sold. Remaining proceeds after loan repayment and fees: minimal.

Scenario C — Any LTV, Active Rehypothecation

BTC drops 40% — rehypothecation chain stress

The platform's rehypothecation counterparty is also facing a margin call. They cannot return the BTC. The platform suspends withdrawals. Liquidation cannot execute — the collateral is inaccessible. The borrower's LTV may be 60% — technically safe — but the collateral is frozen in a third-party insolvency proceeding. Recovery timeline: 18–36 months through legal process. The LTV ratio was irrelevant to this outcome.

The critical insight: the same BTC, the same market event, and three entirely different outcomes — determined by entry LTV and custody structure, not by market severity. This is why borrowers evaluating

What triggers Liquidation in a Bitcoin-backed Loan?

Why Low LTV Changes Everything

The mathematical relationship between entry LTV, liquidation threshold, and required price decline is simple — and its implications are consistently underestimated. Why low LTV is the safest borrowing strategy reduces to a single calculation: how far must BTC fall before the lender can take the collateral?

BTC Decline Required to Trigger 90% Liquidation Threshold

30% entry LTV: BTC must fall ~67% — covers virtually all historical correction cycles
47% entry LTV: BTC must fall ~48% — BetterLending client average; covers most multi-week corrections
50% entry LTV: BTC must fall ~44% — Ledn maximum; APX Lending lower tier
60% entry LTV: BTC must fall ~33% — still survivable in most cycle corrections
75% entry LTV: BTC must fall ~17% — a routine single-week move in volatile conditions
90% entry LTV (YouHodler max): BTC must fall ~0% — margin call at any meaningful decline

The borrower choosing 35% LTV on a platform with a 90% liquidation threshold does not need the market to cooperate. They can survive a 60% decline — a scenario that has occurred in Bitcoin's history but rarely within the kind of timeframe that prevents a structured response. The borrower choosing 75% LTV has effectively eliminated their response window and is relying on market stability rather than structural safety to maintain their position.

Why low LTV is the safest lending strategy in 2026

Platform Comparison: Custody, LTV, and Collateral Control (May 2026)

The table below compares eight major platforms on the structural variables that determine collateral safety — not on headline rates or promotional features.

Platform	Custody Model	Max LTV	Liquidation	Rehypothecation	PoR Verification	Rate From
BetterLending	Segregated cold storage (BitGo), $250M insured	65% (avg 47%)	90% LTV — notification window	❌ Prohibited	24/7 on-chain live	7.00% APR
Unchained Capital	2-of-3 multisig (borrower holds 1 key)	50% (business only, $150K min)	Requires 2-of-3 signatures	❌ Structurally prevented	On-chain via hardware wallet	14.18% APR
Ledn	Custodied: segregated. Standard: pooled	50%	~85% LTV — notification issued	⚠️ Standard: Yes. Custodied: No	Bi-annual audit	11.49% APR
APX Lending	Segregated cold storage (BitGo)	60%	~85% LTV — margin call first	❌ Prohibited	On-chain	12.99% APR (CA)
Nexo	In-house custodial, insurance (limits unspecified)	50–68%	~83% LTV — automated	⚠️ Unconfirmed — verify directly	Published reserves	9.9% APR
CoinRabbit	Custodial, multisig cold wallets	50–90%	80–95% LTV (by product)	❌ Stated policy: no rehypothecation	Not published real-time	11.95% APR
YouHodler	Custodial — Swiss VASP licensed	Up to 97% (plan-based)	Plan-dependent, automated	⚠️ No published guarantee	Not published	Variable / daily fee
Aave (DeFi)	Smart contract — non-custodial on-chain	Asset-dependent (~70–80%)	Health factor breach — instant, automated	❌ Structurally impossible	Fully on-chain, live	Variable (~4.7% avg)

Data based on publicly available platform information as of May 2026. Verify all terms directly with each platform before committing collateral. ❌ = confirmed no rehypothecation ⚠️ = requires direct verification or has conditional policy.

Strategic Perspective: Custody Matters as Much as the Interest Rate

The critical question for any borrower is not simply whether they can access liquidity. It is what happens to the collateral during stress — specifically, during the 30–50% BTC price corrections that have occurred multiple times in the asset's history. The answer to that question is determined entirely by three structural decisions made before the first dollar is borrowed: the entry LTV, the custody model, and the platform's rehypothecation policy.

A borrower who chooses a platform with segregated, non-rehypothecated custody at 47% LTV has structured a position with two independent failure modes reduced to one. The only remaining failure mode is a price-driven LTV breach — manageable through reserve liquidity and a defined personal action threshold. A borrower who enters at 75% LTV on a platform with pooled custody and undisclosed rehypothecation exposure has structured a position with three simultaneous failure modes: market-driven LTV breach, platform insolvency risk, and counterparty chain collapse. The interest rate may be identical. The risk profile is not.

Control matters more than leverage. The Bitcoin holder who borrows conservatively, verifies custody structure, confirms non-rehypothecation in writing, and holds reserve liquidity for collateral top-ups does not need the market to cooperate. Their position survives volatility by design. The borrower who maximises LTV without examining custody structure has substituted hope for discipline — and is exposed to the consequences when the market removes the hope.

Key Risks and Considerations

Custody Risk

The platform's operational failure, security breach, or management error can expose collateral regardless of LTV. Segregated custody with an institutional custodian (BitGo, Coinbase Custody), individual on-chain verifiability, and adequate insurance coverage are the mitigants — not policy statements or marketing claims.

Rehypothecation Exposure

Rehypothecation creates a counterparty chain that can break under market stress. The mitigation is structural — choosing a platform where non-rehypothecation is enforced by wallet architecture (Unchained, BetterLending), not just stated in a policy document. Verify the specific loan agreement clause, not the platform's FAQ.

Liquidation Risk

Automated liquidation engines execute at threshold without waiting for borrower response. The mitigation is entry LTV — entering at 47–55% on a platform with a 90% liquidation threshold provides a 35–48% price decline buffer. The response window between margin call and liquidation must also be confirmed before entry.

Repayment Planning

Repaying a Bitcoin-backed loan using Bitcoin creates a taxable disposal event in most jurisdictions. Pre-funding repayment from fiat or stablecoin reserves before initiating the loan eliminates this trigger. Reserve 10–15% of the loan principal separately for collateral top-ups — adding stablecoin as collateral does not create a disposal event; selling BTC to fund the reserve does.

Platform Insolvency

No lending platform is zero-risk. Segregated custody is the structural protection — not regulatory status alone. A VARA-licensed platform with segregated BitGo custody provides materially different insolvency protection than an unregulated platform with pooled assets, regardless of comparative interest rates.

Conclusion

When Bitcoin is deposited as collateral, it enters a custody system that determines who controls it, how it is stored, whether it can be reused, and under what conditions it can be liquidated. Those four variables — not the interest rate — are the primary structural determinants of whether a Bitcoin-backed loan is a safe, reliable liquidity instrument or an arrangement with hidden failure modes.

Segregated cold-storage custody with on-chain verifiability, a non-rehypothecation policy enforced through wallet architecture, a conservative entry LTV calibrated to the asset's historical drawdown profile, and a platform with a defined notification window before liquidation — these are the conditions under which borrowing against Bitcoin serves its intended purpose: liquidity access without collateral loss. Each of these is confirmed before the deposit transaction is made. After that transaction is confirmed, the structural conditions are set. The collateral is in the system. What happens next depends entirely on decisions already made.

Borrow Against Bitcoin With a Structure Designed to Survive Volatility

BetterLending offers Bitcoin-backed loans from 5–65% LTV with rates starting at 7% APR, terms of 3–60 months, segregated BitGo custody, and no rehypothecation. UAE VARA-regulated. View rates and apply at BetterLending.net.

Frequently Asked Questions

What happens to my Bitcoin after I deposit it as collateral?

The BTC is transferred to a wallet address controlled by the platform or its designated custodian. The borrower loses direct on-chain control for the loan duration. In segregated custody models (BetterLending, APX Lending, Unchained), the collateral sits in a dedicated address identifiable on the blockchain. In pooled models, it is co-mingled with other borrowers' assets. The custody structure determines what happens to the Bitcoin if the platform fails — not just what happens when the loan is repaid normally.

Do I still own my Bitcoin when it is pledged as collateral?

Legally, yes — the borrower retains legal title. The BTC is not sold; no taxable disposal occurs at origination. However, legal ownership does not confer operational control during the loan. The borrower cannot move, sell, or access the BTC until the loan is repaid and the collateral is released. In an insolvency scenario, legal ownership must be exercised through the court process — which is why custody structure (segregated vs pooled) determines the practical outcome.

What is the difference between segregated and pooled custody?

Segregated custody holds each borrower's collateral in a dedicated, individually identifiable wallet — legally ring-fenced from the platform's operational funds. In insolvency, the collateral is directly recoverable as a specific asset. Pooled custody holds all borrower collateral in co-mingled platform accounts. In insolvency, borrowers become general unsecured creditors with no claim to specific assets — as happened to Celsius customers in 2022.

What is rehypothecation and which platforms do it?

Rehypothecation is reusing pledged collateral for the platform's own purposes — lending it out, posting it as margin, or deploying it for yield. Platforms that prohibit it include BetterLending, Unchained Capital (structurally prevented by multisig), APX Lending, CoinRabbit (stated policy), Ledn Custodied product, and Aave (structurally impossible in smart contracts). Ledn's Standard product allows it. YouHodler and Nexo require direct confirmation. Rehypothecation creates a second failure mode independent of BTC price — as demonstrated in the 2022 lender collapses.

What triggers liquidation of Bitcoin collateral?

Liquidation is triggered when LTV rises above the platform's liquidation threshold — typically 85–90% in CeFi, or when the health factor drops below 1.0 in DeFi protocols like Aave. LTV rises when BTC price falls or interest accrues unpaid. Most CeFi platforms issue a margin call at 75–85% LTV before executing liquidation. Automated platforms (Nexo, YouHodler, Aave) execute at threshold without a fixed notification window. BetterLending's liquidation threshold is 90% LTV with a structured notification window before forced execution.

Can I lose my Bitcoin even if my LTV is below the liquidation threshold?

Yes. If the platform becomes insolvent and collateral is pooled or rehypothecated, the Bitcoin may be inaccessible regardless of LTV. The 2022 collapses demonstrated this: borrowers with LTV positions below the liquidation threshold lost collateral access because the platform's custody structure — not the market — failed. Segregated, non-rehypothecated custody with on-chain verifiability is the structural protection against this failure mode.

What is the safest entry LTV for a Bitcoin-backed loan?

For BTC collateral on a platform with a 90% liquidation threshold, 47–55% entry LTV provides a 35–48% further price decline buffer before forced liquidation. BetterLending's clients choose an average of 47% LTV. Ledn caps at 50%. APX Lending's conservative tier is 20–40%. Every percentage point above 55% at entry proportionally increases the probability of a forced liquidation event in normal market correction cycles. LTV selection should be calibrated to the asset's historical drawdown profile, not to the maximum available.

Who controls the private keys to my Bitcoin during the loan?

In full CeFi custody (BetterLending, CoinRabbit, Nexo, YouHodler), the platform or its institutional custodian controls all private keys. The borrower has a contractual claim, not a cryptographic one. In Unchained Capital's 2-of-3 multisig model, the borrower holds one of three keys and can verify collateral on-chain with a hardware wallet at any time — but cannot move it unilaterally. In DeFi (Aave, Morpho), a smart contract holds the keys — no human entity controls the collateral, but liquidation executes automatically at threshold.

How is LTV monitored during the loan?

LTV is recalculated in real time against live market price feeds — continuously, not daily or hourly. Every BTC price movement changes the LTV ratio instantly. Most platforms monitor against exchange price oracles and trigger margin call alerts automatically when the threshold is crossed. Borrowers should set their own personal action threshold — typically 10–15 percentage points below the platform's margin call level — to ensure they respond before the formal notification is issued.

What happens to my Bitcoin if the lending platform goes bankrupt?

The outcome depends entirely on the custody structure. In segregated custody (BetterLending, APX Lending, Ledn Custodied, Unchained), the collateral is legally identifiable and ring-fenced — recoverable through the insolvency process as a specific asset. In pooled custody, the collateral enters the general bankruptcy estate and borrowers become unsecured creditors, receiving pro-rata recovery from whatever remains after secured creditors are paid. This is why the 2022 Celsius customers with technically safe LTV positions still lost access to their collateral for 18–36 months — the structure was pooled, not segregated.

Is borrowing against Bitcoin a taxable event?

The borrowing event itself — pledging BTC and receiving USDC or USDT — is not a taxable disposal in most jurisdictions including the USA, UK, Canada, and Australia, provided the borrower retains beneficial ownership of the collateral. The capital gain on appreciated BTC remains unrealised. However, three events during or after the loan are taxable: forced liquidation of collateral, repayment using BTC proceeds, and interest paid in BTC. Repaying from USD or stablecoin reserves avoids the exit-side tax trigger. Always confirm jurisdiction-specific treatment with a qualified tax adviser before initiating a loan.

How does DeFi Bitcoin lending differ from CeFi in terms of collateral control?

In DeFi lending (Aave, Morpho), collateral is held by a smart contract — no human entity can override the contract's liquidation logic. This eliminates counterparty risk and rehypothecation by design, but introduces smart contract risk and provides no notification window before liquidation. Liquidation is executed by third-party liquidators (not the protocol itself) who receive a bonus — typically 4–10% of the collateral — for executing the liquidation. In CeFi, a human-operated platform controls the liquidation process and may provide notification windows, flexibility in margin call response, and fixed interest rates not available in algorithmically-priced DeFi markets.

This article reflects publicly available platform data as of May 2026. Platform terms, custody structures, and rehypothecation policies are subject to change — verify directly with each lender before committing collateral. This content is for informational and educational purposes only and does not constitute financial, tax, or legal advice. BetterLending.net · betterlending.net