What’s the next step after owning an asset? For most investors, the natural instinct is to make that asset work for them. Basically, to generate some passive income on the assets. If you have extra cash, you might deposit it in a bank or purchase treasury bonds to earn interest. If you own stocks, you might lend them to short sellers in exchange for a fee. The same logic now applies in the world of crypto. If you hold Bitcoin, Ethereum, or any other crypto asset, you’re likely wondering: Can I earn something rather than simply holding this asset? That question leads to one of the fastest-growing use cases in the crypto space—lending.
Consider an investor who believes that the price of Bitcoin will decline in the near term and wishes to profit from that view. To do so, the investor must sell Bitcoin at a high price and later repurchase it at a lower price. However, if the investor does not own Bitcoin, they must first borrow it—and that’s where crypto lending comes into play. To borrow one Bitcoin, which might be trading at $100,000, the investor would typically need to post collateral worth more than the borrowed amount, say $150,000 in cash or stablecoins.
This overcollateralization serves as a safeguard for the lender. Once the collateral is in place, the investor borrows the Bitcoin, sells it on the open market, and hopes to repurchase it later at a lower price. If Bitcoin’s price falls by 20%, the investor can buy it back at $80,000, return the borrowed Bitcoin to the lender, pay a small interest fee, and retain the difference as profit. However, if the trade goes against them and the price of Bitcoin rises instead, the lender is protected due to the collateral. At a certain threshold, the lender has the right to liquidate the collateral, ensuring they recover the value of the loaned asset. This mechanism forms the foundation of crypto lending markets, where borrowers take positions and lenders earn interest—creating a new layer of financial activity atop digital asset ownership.
Centralized platforms like Coinbase allow users to lend out their crypto assets by acting as intermediaries between lenders and borrowers. Much like traditional banks, these platforms collect interest from borrowers and distribute a portion of it to depositors—after deducting a service fee. In this arrangement, users place their trust in the centralized institution to manage risk, ensure proper collateralization, and safeguard their assets in the event of adverse market movements. This traditional lending and borrowing model is part of what is known as Centralized Finance (CeFi), where transactions are facilitated and overseen by a regulated third party. The NY Stock Exchange or Coinbase exchange are examples of CeFi in trading.
Custodial services by a third party is another example of CeFi in custody like BNY Mellon and State Street. Visa and Master card are examples of CeFi in payments and settlements between merchants and banks. DTCC is an example of a centralized clearing house that settles trades between participating firms. Notable examples of early CeFi lenders in the crypto space include Genesis, founded in 2013 as an OTC trading desk that later became a major institutional lender, issuing over $130 billion in loans before filing for Chapter 11 bankruptcy in 2022.
Similarly, BlockFi and Celsius Network, which rose to prominence around 2018, controlled much of the crypto lending market by early 2022. However, all three platforms suffered catastrophic failures following the collapse of Terra-Luna, the implosion of Three Arrows Capital, and the FTX bankruptcy. These events revealed the core vulnerability of centralized systems: human error, poor risk management, scammer founders, being hacked or operational failures. Despite being regulated or institutional in nature, CeFi platforms do not eliminate the risk of asset loss—they merely shift it to the competence and integrity of the intermediary. You had a decentralized asset which you put on a centralized exchange and risked the whole asset for a small amount of passive income.
The remarkable genius of human ingenuity is that, the next generation founders and innovators in this space created a decentralized way of lending or trading crypto without the need of a centralized platform or middleman. In the lending space the first set of decentralized players were MakerDAO, Compound and Aave. This relied on the code and smart contracts and you never had to give away your ownership of the underlying crypto to platforms that could have an operational system or human error. Services on crypto assets done by decentralized platforms are called DeFi or Decentralized Finance. Uniswap, PancakeSwap, Curve and Raydium are decentralized exchanges where you can trade cryptocurrencies instead of trading on centralized exchanges like Binance or Coinbase. Aave and Compound are platforms where you can lend and borrow cryptocurrencies without a middleman.
Aave has a TVL or total value locked of 24 billion dollars as of early 2025. TVL or total value locked represents the total value of crypto assets currently deposited in a lending protocol. It’s a key metric for assessing the liquidity and overall health of the platform. A higher TVL generally indicates more liquidity available for lending and borrowing, and can be seen as a measure of the protocol’s strength and user confidence. TVL in DeFi lending and borrowing specifically refers to the total value of cryptocurrencies deposited into the lending platform’s smart contracts. This includes assets used as collateral for loans and assets lent out to earn interest.
Aave uses a single-borrowable asset model, while Compound uses a pooled-risk model. This means that if one asset in the pool crashes in Compound, it could lead to liquidations of other assets in the pool. In Aave, if one asset crashes, it will only affect that asset. Aave is universal lending/borrowing with innovations. Compound is basic money markets. Aave offers flash loans, flexible interest rates, and a broader range of assets, including newer tokens. It is deal for advanced users seeking flexibility. Compound provides fixed interest rates, simplicity, and a user-friendly experience, with a focus on stablecoins and major tokens.
The major advantage of DeFi platforms is that you can borrow and lend at any time, 24×7 365 days a year compared to traditional finance or assets. Let us assume you have gold and you need to pledge it at night for some emergency, you might not find a gold loaning bank or broker at night. If you want to get a mortgage equity line open your house, that is a 40-60 day process with a credit officer going through your documents and then deciding to give you a loan based on your payment eligibility.
They say an asset is there to pledge and take equity off of it in time of need but sometimes with traditional assets it just need not happen and if it’s an illiquid asset like real estate you might not be able to offload the asset quickly either at market rates. DeFi platforms do not care if you can payback. They will lend you a percentage of your assets at market interest rates anytime. And the money reaches your account that very instant. If you are a lender on a crypto DeFi lending platform, the platform ensures that your money is protected live in the market with the collateral. It is a win-win situation for all parties involved. You do not have to go through lengthy KYC/ AML and regulatory bureaucratic forms either. The borrower and lender receive better interest rates than the rates obtained from CeFi platforms because CeFi platforms have large regulatory and compliance overheads and the borrower and lender ends up paying for those in the end.
The limitations of the DeFi platforms for lending are it relies on code and smart contracts. Code and smart contracts can end up having bugs and you could lose your collateral if they are hacked. Aave version 1 had vulnerability in the interest rate calculation was discovered and patched before it was exploited. In Compound, a bug in a governance proposal in 2021 caused millions in excess COMP rewards to be distributed unintentionally. Since the protocol is decentralized and immutable, the team could not reverse the error. Blockchain platforms are stateless systems, they use oracles to get pricing from the market. If oracles are manipulated or fail, it can cause Under-collateralized loans and Incorrect liquidations. The experience in DeFi is not as user friendly as traditional platforms.
Flash loans in Aave (and other DeFi protocols) are a unique form of instant, uncollateralized loans that must be borrowed and repaid within the same transaction on the blockchain. If the loan isn’t repaid instantly—including fees—the entire transaction is reversed, as if it never happened. They are highly technical and Not accessible to everyday users—requires smart contract deployment. The exploit potential is hgh and Many DeFi attacks used flash loans to manipulate prices temporarily (e.g., bZx hacks, Harvest Finance). Oracle manipulation can cause temporary slippage or price shifts during a flash loan and can trigger false liquidations. It is an opportunity also. Some skilled developers have reportedly made six-figure earnings in a single day by building arbitrage bots that identify fleeting price discrepancies using flash loans on platforms like Aave and Uniswap and do the whole loan and trade in one single transaction.
As crypto matures, simply holding your assets is no longer the only strategy. Lending, borrowing, and advanced mechanisms like flash loans offer innovative ways to generate returns—provided users understand the risks and nuances of the platforms they engage with. While CeFi platforms brought early convenience to crypto lending, their vulnerabilities—from poor risk oversight to centralized mismanagement—have shown us the cost of misplaced trust. Enter DeFi, where smart contracts replace middlemen, markets run 24/7, and access is open to anyone with a wallet and an internet connection. From MakerDAO’s pioneering model to Aave’s flash loan innovations, decentralized finance empowers users to put their crypto to work on their own terms. Still, it’s not without risks. Bugs in code, oracle dependencies, and user-unfriendly interfaces remind us that DeFi is still evolving. But for those willing to learn and engage thoughtfully, the opportunities to monetize crypto assets in a smart, secure, and borderless way have never been greater. The choice is no longer just HODL or sell—you can now lend, borrow, trade, or leverage. Just do it smartly.
We’ve entered an era where ownership is no longer passive—it’s participatory. In traditional finance, owning an asset did not mean you could become a banker and collect deposits or lend it out anyone because that involved regulatory permissions and also massive amounts of money that had to be deployed for setting up controls. In crypto, that mindset is being disrupted.
The rise of decentralized finance invites us to think differently: not just about how we invest, but how we interact with value itself.
Crypto lending, borrowing, and innovations like flash loans aren’t just financial tools—they are philosophical shifts. They challenge the need for permission, the role of institutions, and the definition of trust. Instead of relying on a banker, broker, or regulator, you’re relying on math, code, and community-driven protocols. Of course, responsibility comes with that freedom. The ease of access must be met with education. The power to earn must be balanced by awareness of risk. But for the curious, the bold, and the forward-thinking, crypto offers something rare in finance: a system built for the user, not just the institution.
In this new financial landscape, the question isn’t just “what do you own?”—it’s “how will you make it work for you?”
Nithin Eapen is a technologist and entrepreneur with a deep passion for finance, cryptocurrencies, prediction markets and technology. You can write to him at neapen@gmail.com
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