DeFi Lending Guide: How Crypto Borrowing and Lending Work

TL;DR

• DeFi lending uses smart contracts or comparable onchain programs to match supplied liquidity with collateralized borrowing.
• Suppliers earn a variable return when their assets are active in a lending pool. Borrowers pay a variable rate and risk liquidation if their collateral no longer supports the debt.
• Liquidium has two borrowing paths. Simple creates one address-based loan without requiring an account or wallet connection. Advanced requires sign-in and manages supply, borrow, repay, and withdraw actions through one portfolio.
• Native BTC and ETH routes use their native networks. ICP routes use ICP or supported ckAssets, with different asset controls and address formats.
• Live rates, limits, liquidity, network fees, and processing estimates can change. Review the current transaction in the app before sending funds or confirming an action.

DeFi lending lets one user supply crypto while another borrows from the available pool. Code enforces the loan rules, records debt and collateral, calculates interest, and opens liquidation when a position becomes unsafe.

The mechanics are compact, but both sides take on risk. Suppliers accept protocol and liquidity risk in exchange for yield. Borrowers keep exposure to their collateral while adding interest and liquidation risk. Understand those tradeoffs before choosing a product.

What is DeFi lending?

DeFi lending is onchain borrowing and lending without a bank deciding who qualifies. Suppliers deposit assets into a lending pool. Borrowers draw available assets from that pool after posting enough collateral to secure the debt.

Most crypto loans are overcollateralized. The collateral is worth more than the amount borrowed when the position opens. That buffer protects the pool against ordinary price movement, but it does not guarantee repayment. If the collateral value falls or the debt grows far enough, the protocol can liquidate collateral to repay the pool.

DeFi replaces a company's internal loan ledger with public network transactions and programmable rules. It does not remove every intermediary or risk. Interfaces, price oracles, smart contracts, canisters, validators, wallets, and network infrastructure still affect the result.

How a lending pool works

The basic cycle has four parts.

1. A supplier deposits an asset into a pool.
2. A borrower posts eligible collateral and borrows from the pool's available liquidity.
3. Interest accrues on the borrow. Part of that interest funds the supplier return under the protocol's rules.
4. The borrower repays the debt, or the protocol liquidates collateral if the position reaches its risk threshold.

Supplying and borrowing solve different problems. A supplier wants a return on an asset they are prepared to place at risk in the protocol. A borrower wants liquidity without selling the collateral first.

Both sides depend on the same pool. If borrowing demand rises relative to available supply, a dynamic interest-rate model can raise borrow rates and supplier returns. If utilization falls, rates can fall. The exact curve depends on the market, so the rate shown today is not a promise about tomorrow.

Read Liquidium's supply documentation for the current Advanced deposit paths and borrow documentation for live limits, fees, and destination options.

Supplying crypto for yield

When you supply an asset, you make it available to a lending pool. Once the supply becomes active, it can earn a variable APY. The displayed APY includes compounding, but it can move with utilization and market conditions.

An active supply carries different risk from cash in an insured savings account. Your position depends on the protocol's code, the asset, the network, pool liquidity, and the market's ability to absorb liquidations. Withdrawal may also depend on available liquidity. If much of a pool is borrowed, all supplied funds may not be immediately withdrawable.

On Liquidium, supplying belongs to Advanced. You sign in, choose a supported asset from the live picker, and follow the linked-wallet or deposit-address route shown for that asset.


An eligible active supply can also support Advanced borrowing. That adds a second role for the asset: it can earn a variable return while contributing to the portfolio's borrowing capacity. Borrowing against it introduces liquidation risk.

Borrowing against crypto collateral

A collateralized crypto loan gives you another asset while you keep economic exposure to the collateral. You might borrow a stablecoin for spending or working capital while keeping BTC or ETH locked in the loan.

The debt grows as interest accrues. The collateral remains locked under the loan rules. If its market value falls, the loan moves closer to liquidation even if you never borrow another cent.

Before borrowing, check:

• the collateral and borrowed asset
• the network used for each transfer
• the current borrow APY and any fees
• the amount expected at the destination
• LTV or projected portfolio health after the borrow
• the liquidation threshold and your safety buffer
• the repayment asset, network, and address

Liquidium shows current values in the transaction flow. Available liquidity and market limits can reduce the maximum borrow below the amount suggested by collateral value alone.


LTV, portfolio health, and liquidation

Loan-to-value ratio, or LTV, compares debt value with collateral value.

LTV = debt value / collateral value

If you borrow $4,000 against $10,000 of collateral, the starting LTV is 40%. If the collateral falls to $8,000 while the debt stays near $4,000, LTV rises to 50%.

Each market has a liquidation threshold. Once the position reaches that threshold, a liquidator can repay debt and receive collateral under the protocol's rules. Liquidation can cost you collateral and may happen during fast price moves before a pending repayment or collateral deposit finishes processing.

Liquidium displays risk differently in its two modes:

• Simple shows LTV for one dedicated loan.
• Advanced calculates portfolio health across eligible supplied collateral and active debt in the signed-in portfolio.

The default Advanced percentage view shows 100% when the portfolio has no debt and 0% at the liquidation threshold. You can switch the display to a decimal Health Factor or LTV view. Read the Health Factor documentation before borrowing against several assets.


Adding eligible collateral or repaying debt can improve the position after the transaction confirms and Liquidium processes it. Borrowing more, falling collateral prices, or accrued interest can reduce the buffer.

Repayment and collateral withdrawal

Crypto-backed debt on Liquidium has no monthly payment schedule or fixed maturity date while the position remains healthy. Interest continues to accrue until the debt is repaid.

Simple and Advanced handle the end of a loan differently.

For a Simple Loan, you send the borrowed asset to the loan's dedicated repay address. A partial repayment lowers debt and LTV but does not release collateral. Liquidium returns the collateral to the refund address after the full debt has been repaid and processed.

For Advanced, you repay part or all of a borrowed position from the portfolio. Repayment reduces debt after it confirms and processes. It does not withdraw supplied collateral. Use the separate withdrawal action when the remaining portfolio health and pool liquidity allow it.

The repayment guide covers Advanced repayment methods and pending states. The withdrawal guide covers the separate collateral withdrawal flow.

DeFi lending vs. CeFi lending

Centralized finance lenders hold customer balances and manage loans on an internal ledger. They may set account requirements, control withdrawals, and make credit or collateral decisions under their own policies.

DeFi lending uses onchain assets and programmable rules. Users interact through wallets or supported addresses, and public transactions make the movement of funds easier to verify. The protocol can still have an interface, governance process, risk parameters, price feeds, and operators responsible for maintenance.

The practical tradeoff is control versus responsibility. DeFi can give you direct access to the loan rules and transactions, but it also makes address checks, collateral monitoring, and transaction timing your problem. A wrong network or incompatible address may be impossible to reverse.

How interest rates are set

Many DeFi lending markets use utilization-based rates. Utilization measures how much of the supplied pool borrowers have taken.

Low utilization leaves more liquidity idle, so rates may be lower. Higher utilization can push rates up to attract supply and discourage more borrowing. Some models increase rates sharply after a target utilization point to protect withdrawal liquidity.

Rates can change. A borrow that looks affordable can become more expensive, and a supplier APY can fall. Review the live APY, market utilization, and the transaction's projected effect instead of building a plan around a fixed rate.

How Liquidium's two lending modes work

Liquidium separates one-off loans from portfolio lending. The selector at the top of the app switches between Simple and Advanced.

Simple: one dedicated address-based loan

Simple lets you choose the borrow and collateral assets, enter refund and destination addresses, generate a loan, and fund its supply address. It does not require an account or wallet connection.

Each Simple Loan has its own six-character Loan ID, supply address, repay address, refund address, destination address, LTV, and transaction history. That makes it useful for hardware wallets, air-gapped setups, exchange accounts, and other tools that can send the collateral and receive the borrowed asset without connecting to Liquidium.


Sign-in is optional through Internet Identity or a supported wallet. While signed out, recent loans are stored in the current browser. If you sign in later, loans saved in that browser can sync to your profile. A profile also lets you reuse saved addresses and apply a configured email to supported Simple Loan notifications.


Save the Loan ID and receipt even when you use a profile. Browser data can be cleared, and those records give you another route back to the loan.

Use the Simple Loan documentation for the operational flow. The Simple Bitcoin Loans guide covers the accountless BTC use case without repeating it here.

Advanced: one signed-in lending portfolio

Advanced requires sign-in with Internet Identity or a supported wallet. You supply assets, borrow against eligible active collateral, repay debt, and withdraw eligible supplies through one portfolio.

Risk is calculated across the eligible collateral and debt in that portfolio. This gives you one view of several positions, but it also means a change in one asset can affect the health of the whole portfolio.

Use Advanced when you want to earn variable supply yield, manage more than one supplied or borrowed asset, or see borrowing capacity and risk at portfolio level. The native cross-chain lending guide has the complete product walkthrough.

Native assets, ICP, and ckAssets

Check both the asset name and network. BTC and ckBTC represent different routes. ETH and ckETH do too. The same distinction applies to native stablecoins and their ckAsset versions.

In Simple, the token picker has its own ICP assets switch. Leave it disabled to choose supported native-network routes. Enable it to choose ICP or a supported ckAsset route.


In Advanced, the control lives in Settings under ICP assets. This setting is separate from the Simple token-picker switch.


Advanced can fund supported Ethereum routes from a linked Ethereum wallet. Native BTC uses the asset-specific deposit-address path; connected Bitcoin accounts cannot fund Advanced Supply directly.

For Oisy, approve the Ethereum-account sign-in first, then open Settings, connect the Oisy ICP account, and approve the second request. The ICP account is not linked automatically. Once linked, it can handle supported supply, borrow, repay, and withdrawal transactions for ICP, ckBTC, ckETH, ckUSDC, and ckUSDT. Advanced shows supported ICP assets and ckAssets by default after linking; turn off ICP assets to switch back to native-chain routes.

Address-based methods remain available where offered. For ckAsset deposits or repayments, use the complete ICRC-1 account shown by the app. For borrows and withdrawals, use the exact address format the current transaction requests. Read ICP assets and Oisy before sending an ICP asset or ckAsset.

DeFi lending risks

Yield and access to liquidity come with risk. Review at least these categories:

• Liquidation risk: Collateral prices can fall, debt can grow, and a position can cross its liquidation threshold.
• Smart-contract and canister risk: Bugs, integration faults, or unexpected interactions can put funds at risk.
• Oracle risk: Incorrect or delayed price data can affect borrowing capacity and liquidation.
• Liquidity risk: A pool may not have enough available liquidity for the borrow or withdrawal you want.
• Network risk: Congestion, reorgs, bridge or chain-key components, and finalization delays can slow an action.
• Address and asset risk: Sending the wrong asset, using the wrong network, or entering an incompatible address can cause permanent loss.
• Rate risk: Variable borrow APY can rise and supplier APY can fall.

Liquidium completed an independent Trail of Bits review of the ICP canisters used for Cross-Chain Loans. A review can find and help fix implementation issues. It cannot remove liquidation, market, liquidity, network, or user-error risk. The security-review announcement explains its scope.

A practical DeFi lending checklist

Before supplying:

• Confirm the exact asset and network.
• Review the live supply APY and pool conditions.
• Check how withdrawal liquidity works.
• Decide whether you will also use the supply as collateral.

Before borrowing:

• Choose Simple or Advanced before moving funds.
• Check LTV or projected portfolio health and leave a buffer.
• Review the live borrow APY, fees, available liquidity, and destination amount.
• Verify every address and know the repayment route.
• Save the Loan ID and receipt for a Simple Loan.
• Monitor pending actions until the app shows that they have processed.

Start with the job you need done

Supply when you want to put an idle asset into a lending pool and accept the protocol, liquidity, and market risks behind a variable return.

Borrow when you need liquidity and are prepared to lock collateral, pay interest, and monitor liquidation risk. Choose Simple for one dedicated, address-based loan. Choose Advanced for a signed-in portfolio that combines supply, borrow, repay, and withdraw actions.

Open Liquidium and review the live assets, rates, networks, limits, and transaction details before you commit funds.

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This article is for educational purposes only and does not constitute financial, legal, or tax advice. DeFi lending can result in partial or total loss of funds or collateral.

FAQs

How do lenders make money in DeFi?

Suppliers can earn a variable return when borrowers pay interest to use pool liquidity. The APY depends on the protocol's rate model, utilization, and market conditions. It is not guaranteed.

Do I need an account to use DeFi lending on Liquidium?

Simple Loans do not require an account or wallet connection. Optional sign-in can sync browser-stored loans to a profile. Advanced requires sign-in with Internet Identity or a supported wallet.

Can I lose money by lending crypto?

Yes. Smart-contract or canister faults, asset problems, oracle failures, liquidity shortages, network issues, and other protocol risks can cause losses. A high displayed APY does not compensate automatically for those risks.

Can I lose collateral when borrowing?

Yes. If LTV or portfolio health reaches the applicable liquidation threshold, the protocol can sell collateral to repay debt. Address mistakes and failed network transfers can also cause losses.

Are DeFi lending rates fixed?

Liquidium's displayed supply and borrow APYs are variable. Check the current rate and projected transaction effect in the app.

Is there a fixed repayment date?

Liquidium debt has no fixed maturity date while the position remains healthy. Interest keeps accruing, and liquidation remains possible until the debt is repaid.

What is the difference between native assets and ckAssets?

Native BTC and ETH use their native networks. ckBTC, ckETH, ckUSDC, and ckUSDT use ICP. The assets require different controls and address formats, so follow the network and address shown for the current transaction.

Should I use Simple or Advanced?

Use Simple for one dedicated loan without mandatory sign-in or wallet connection. Use Advanced when you want a signed-in portfolio for supplying, borrowing, repaying, and withdrawing across eligible positions.