Decentralized Finance (DeFi) lending platforms enable investors to access liquidity by borrowing against their cryptocurrency assets without the necessity of selling them. This approach offers flexibility for various purposes, including trading, yield farming, or covering real-world expenses, allowing users to maximize the utility of their digital assets.
Crypto Borrowing Rates for June 2025
| Token | Aave v3 | Aave v2 | Spark | MakerDao | Compound |
|---|---|---|---|---|---|
| USDC | 0.6% | 2.4% | — | 0% | — |
| USDT | 4.97% | 9.47% | — | 3.96% | — |
| WETH | 2.08% | 1.29% | — | 0% | — |
| WSETH | — | — | — | — | — |
| WEETH | 0% | — | — | 0% | — |
| WBTC | 0.26% | 1.27% | — | 0 | — |
| I4.98% | 8.78% | — | — | — |
Data is refreshed every 30 minutes.
Reasons for Borrowing Crypto
The practice of borrowing cryptocurrency is favored for several strategic reasons, primarily focusing on two main concepts: leveraging assets and avoiding taxable events.
Leverage Creation
Users can utilize their cryptocurrency holdings to borrow and establish synthetic leveraged positions within the market. For instance, an individual might borrow stablecoins against Ethereum (ETH) and subsequently use those stablecoins to acquire additional ETH, effectively increasing their market exposure. Alternatively, a user could borrow ETH using stablecoins, allowing them to short-sell in the market, with the intention of repurchasing the ETH at a lower price to realize a profit.
Avoiding Tax Implications
By borrowing against their cryptocurrency assets, users can achieve quick liquidity without needing to liquidate their holdings. This strategy is particularly advantageous as it circumvents the tax implications that arise from selling crypto while still providing access to cash. While some centralized platforms allow users to borrow fiat currencies against their crypto assets, such platforms have become less prevalent following the bankruptcy of several centralized lenders in 2022.
Leading DeFi Borrowing Protocols
1. Aave
Aave stands out as a prominent DeFi lending protocol available on over 14 EVM chains, including Ethereum, Arbitrum, and Optimism. It permits users to borrow a variety of stablecoins, ETH, liquid staking tokens (LSTs), and other DeFi assets. To secure a loan, borrowers must deposit collateral exceeding the borrowed amount; interest rates are variable and determined by market demand. Aave also offers flash loans, allowing for uncollateralized borrowing within a single transaction for a nominal fee of 0.05%. The protocol’s stablecoin, GHO, is backed by overcollateralized assets. Users who stake AAVE in the Safety Module can earn between 5% and 7% annual percentage yield (APY), along with additional rewards and discounts on fees.
2. Sky Protocol (Formerly MakerDAO)
Sky Protocol functions as a stablecoin lending platform on the Ethereum and Gnosis chains, initially launched as MakerDAO in 2014 and rebranded in 2024. Borrowers can mint stablecoins such as USDS or DAI by locking up collateral, including ETH, WBTC, LSTs, stablecoins, or real-world assets, with a collateral ratio ranging from 110% to 200%. USDS is pegged to the U.S. dollar and can be exchanged 1:1 for DAI, both derived through overcollateralized smart contracts. Borrowing is primarily managed via Summer.Fi, with annual interest rates varying between 0.5% and 5%, influenced by collateral type and governance decisions. Governance is determined by SKY token holders, who have the authority to vote on critical matters such as collateral types and borrowing rates.
3. Compound
Compound operates as a DeFi lending protocol on Ethereum and over ten other chains, allowing users to borrow stablecoins, ETH, and various DeFi tokens by providing collateral. Loans must be overcollateralized, and interest rates fluctuate based on supply and demand, offering borrowers transparency and flexibility. Compound V3 organizes loans into distinct markets, each permitting the borrowing of a single token while accepting various tokens as collateral. When a user borrows, they receive cTokens that track their loan and can be utilized across other DeFi platforms. Users can borrow directly through the compound.finance site or through compatible wallets like MetaMask. Additionally, borrowers can earn COMP token rewards, with governance decisions made by COMP holders.
4. Spark
Spark is a lending protocol situated on Ethereum and Gnosis Chain, developed as the first ‘Star’ under Sky Protocol (previously a MakerDAO SubDAO). Through SparkLend, users can borrow major tokens such as USDS, DAI, and ETH by providing collateral, including sUSDS or stablecoins. Loans are overcollateralized, and borrowing rates are kept low through Spark’s connection to Sky’s Direct Deposit Dai Module (D3M), which enhances liquidity from platforms like Compound and Aave. Borrowers benefit from competitive rates and can earn SKY rewards via the Sky Savings Rate system. The protocol is governed by SPK token holders, who vote on enhancements to borrowing terms and platform performance.
5. Morpho
Morpho is a DeFi lending protocol operating on Ethereum and Base, allowing users to borrow assets like USDC, DAI, ETH, and WBTC through customizable markets. Its flagship offering, Morpho Blue, supports over 190 markets with tailored terms, high loan-to-value ratios, and no protocol fees unless decided by governance. Loans are overcollateralized, featuring a peer-to-peer layer to provide better rates and pooled liquidity for support. Borrowers can access MetaMorpho vaults for managed liquidity and utilize complimentary flash loans for advanced strategies. Governance is managed by MORPHO holders, who vote on market parameters, with borrowing executed via morpho.org or integrations such as Coinbase.
6. Kamino
Kamino is recognized as Solana’s leading lending protocol, facilitating the supply and borrowing of assets like SOL, USDC, PYUSD, jitoSOL, mSOL, stablecoins, and kTokens. Similar to other platforms, loans are required to be overcollateralized, with interest rates adjusting dynamically across various markets, including Main, JLP, Ethena, and Altcoins. Each market presents unique risk profiles and asset types. Borrowers can access up to 95% loan-to-value (LTV) in eMode for correlated pairs, while Multiply Vaults allow for up to 10x leverage using flash loans. Built-in risk management tools, such as auto-deleveraging and Scam Wick Protection, are also incorporated. Governance is managed by KMNO holders, who vote on protocol settings and earn rewards through a points program related to borrowing.
How to Obtain a DeFi Loan
Acquiring a DeFi loan is straightforward for those already possessing cryptocurrency, as identity verification is not necessary. The process involves setting up a compatible web3 wallet, selecting a DeFi borrowing platform that supports desired tokens, depositing a supported cryptocurrency as collateral, and finally borrowing the preferred token against the collateral. Once completed, users should aim to repay the loan promptly to avoid accruing additional interest or facing liquidation.
Types of Leverage in DeFi Loans
The leverage available in a DeFi loan largely depends on the platform and the collateral provided. Most platforms necessitate overcollateralization, requiring users to deposit more value in collateral than the amount borrowed. Common collateralization ratios range from 110% to 200%, indicating that for every $100 borrowed, users need to deposit between $110 and $200 worth of collateral. This overcollateralization is crucial for ensuring that loans can be fully repaid, even amid market volatility. The loan-to-value (LTV) ratio is another common way to express borrowing limits; for example, a 60% LTV means borrowers can access up to 60% of their collateral’s value.
Understanding Flash Loans
Flash loans are unique unsecured DeFi loans that must be repaid within the same block of a blockchain transaction. If the entire amount is not returned within the transaction, the entire operation is reversed to mitigate risk for the lender. Due to the lack of collateral requirement, flash loans are attractive for users looking to execute arbitrage, swap collateral, or refinance without traditional collateral. However, utilizing flash loans generally necessitates proficiency in smart contract programming to ensure that all operations are executed within a single transaction.
Risks Associated with DeFi Borrowing
Liquidation Risk: Borrowers face liquidation risk due to the inherent volatility of collateral assets. If the value of the collateral drops significantly during a market downturn, it may trigger an automatic sale of the assets to cover the loan.
Smart Contract Risks: These risks arise from potential bugs or vulnerabilities in the DeFi protocol’s code. Such vulnerabilities can lead to malfunctions or may be exploited maliciously, resulting in significant losses for users. Major protocols often conduct audits and run bug bounty programs to minimize these risks.
Oracle and Price Feed Risks: Risks associated with oracles occur when external data sources used to provide asset prices malfunction or are manipulated. This is a common vector for hacks and can lead to incorrect pricing, resulting in unfair liquidations or loans that are insufficiently collateralized.
Significant DeFi Borrowing Hacks
To date, billions of dollars have been lost in DeFi exploits, often utilizing flash loans to carry out the attacks. While such incidents have brought attention to vulnerabilities in smart contracts and driven improvements in coding standards, they have also resulted in substantial financial losses. Here are some of the most notable hacks:
- Beanstalk: $182 million lost in April 2022 due to a flash loan attack where the attacker gained governance control.
- Compound: $150 million was at risk in October 2021 from a critical bug that led to the distribution of excess COMP tokens.
- Cream Finance: $130 million lost from a flash loan attack in October 2021, exploiting a pricing vulnerability.
- Mango Markets: A $116 million exploit in October 2022 involved price manipulation to drain funds.
- bZx: A private key breach in November 2021 led to a loss of $55 million across Binance Smart Chain and Polygon.
- Vee Finance: In September 2021, the platform was exploited through its leveraged trading feature, resulting in a $35 million loss.
DeFi Borrowing Frequently Asked Questions
A DeFi loan allows users to borrow cryptocurrency by providing collateral on a DeFi lending platform, typically requiring overcollateralization to safeguard lenders. Risks associated with DeFi borrowing include liquidation due to collateral volatility, smart contract exploits, and oracle risks, which can vary based on the platform and assets involved. Most DeFi loans exceed the value of the collateral, with common ratios between 110% and 200%. Unlike traditional loans that involve fiat currencies and intermediaries, DeFi borrowing is decentralized, utilizing smart contracts on blockchain networks. Additionally, flash loans allow for borrowing without upfront capital but require the funds to be repaid within a single transaction, necessitating advanced coding skills for execution.
