How crypto-backed loans work (2026 borrower's guide)
A crypto-backed loan lets you pledge digital assets as collateral and borrow stablecoins or fiat against them. Repay on time and you get the collateral back; miss the deadline or let the loan-to-value drift too high and the smart contract liquidates the collateral automatically. There is no credit-bureau pull, but the entire collateral can be lost.
Crypto-backed loans are the simplest way to get liquidity without selling. You pledge digital assets as collateral, the protocol gives you stablecoins (or fiat) against that collateral, you pay interest, and you get the collateral back when you repay. The whole loan is enforced by a smart contract — no underwriter, no bureau pull, no “decision in 7–10 business days.” That same automation is what makes the loans risky: the contract liquidates without a phone call.
How does a crypto-backed loan work, step by step?
- You pick collateral. ETH, BTC (as wrapped BTC), stablecoins, blue-chip ERC-20s, and increasingly LSTs and LRTs.
- You pick a loan amount. The protocol enforces a maximum loan-to-value (LTV), e.g. 50% — that’s how much you can borrow relative to the collateral’s current price.
- The protocol locks the collateral. Your wallet signs a deposit transaction. The collateral moves into a vault you don’t control until the loan is closed.
- You receive the borrowed asset. Usually USDC, USDT, or a similar stablecoin in the same transaction.
- Interest accrues. Often by the second, often at a variable rate that changes with utilization.
- You repay before the due date. Principal plus accrued interest plus any protocol fees. The collateral unlocks back to your wallet.
What is the loan-to-value ratio (LTV)?
LTV is the single most important number on the loan. It’s the loan amount divided by the current value of the collateral. Protocols enforce two limits:
- Maximum LTV at origination — the most you can borrow at the start. Often 50–75% on volatile collateral.
- Liquidation LTV — the line above which the smart contract liquidates. Usually 5–10 percentage points above the maximum, leaving a buffer for price movement.
If your collateral’s price falls, your LTV rises. Hit the liquidation line and the protocol sells collateral to repay the loan, often with a liquidation penalty on top.
What happens if I don’t repay?
Two paths to default exist, and both end the same way:
- Term-based default — the loan has a fixed maturity (30 days, 90 days, 6 months) and you miss the date.
- LTV-based default — the collateral’s price drops, your LTV crosses the liquidation threshold, and a liquidator triggers the on-chain liquidation function.
In both cases, the protocol sells your collateral at the current market price, repays itself in full, takes its liquidation fee, and (depending on the protocol) returns the residual to your wallet. If the collateral’s market price at liquidation is less than what you owe, you may remain liable for the deficit. If it’s more, you may or may not get the surplus back — the rules vary by protocol.
How does a crypto-backed loan compare to a personal loan?
| Crypto-backed loan | Unsecured personal loan | |
|---|---|---|
| Approval signal | Collateral value | Credit score + income |
| Bureau pull | None | Hard or soft inquiry |
| Speed to funding | Minutes | 1–7 days |
| Maximum loan | Bounded by collateral × max LTV | Bounded by debt-to-income |
| Default risk | Lose the collateral | Credit damage, collections |
| Rate | Variable, protocol-set | Fixed at origination |
How do I avoid getting liquidated?
Three habits cover most of the risk:
- Borrow well below the max LTV. If the protocol allows 75%, borrow at 40–50%. The buffer is what gives you time when prices move.
- Monitor your loan’s on-chain status. The contract is the source of truth; the app is informational. Don’t assume a notification will land — most platforms don’t guarantee them.
- Keep dry powder. Have stablecoins ready to top up collateral or repay early if your LTV starts drifting.
Where can I get a crypto-backed loan?
Teller routes you to vetted lending protocols (including the Teller Protocol itself) based on which chain your collateral lives on and what loan size you need. Open the app, head to the home tab, and the loan-offer rail surfaces the matches your wallet currently qualifies for. Compare APRs, durations, and required LTVs before signing.
The risks, restated
- You can lose 100% of any collateral pledged.
- Rates and due dates displayed in any front-end are estimates — the on-chain contract is authoritative.
- Liquidation can happen at any time, including outside business hours, during congested blocks, or while you can’t reach the app.
- Smart-contract bugs, oracle failures, and protocol governance actions can affect your loan in ways no front-end controls.
For the full liability framing, read the Teller Terms of Service — Section 7 covers collateral-backed loans in detail.
Frequently asked questions
No. Most crypto-backed lenders don't pull a bureau credit report. Approval is collateral-based — if your wallet can post enough qualifying assets, you can borrow.
Yes. If you fail to repay by the loan's due date, or the collateral's value drops below the protocol's required loan-to-value ratio, the smart contract liquidates the collateral automatically — possibly in full. This is the single biggest risk and is enforced by code, not by a person.
LTV is the loan amount divided by the collateral's current market value. A 50% LTV on $10,000 of ETH means you can borrow up to $5,000. Lower LTVs are safer; higher LTVs leave less buffer before the price moves trigger a liquidation.
Rates vary by protocol, collateral type, and market conditions. Stablecoin-borrow rates against blue-chip collateral (ETH, BTC) have historically ranged from roughly 4% to 12% APR, but the displayed rate is variable and can change before or during the loan term.
In most jurisdictions, borrowing against your crypto is not itself a taxable event — you haven't sold. However, liquidation, repaying in a different asset than you borrowed, or wrapping native tokens to use as collateral can trigger taxable events. Consult a tax professional for your situation.
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