Crypto loans and liquidation: borrowing against coins you don't want to sell

Crypto lending lets you borrow without selling. You deposit coins as collateral, borrow stablecoins or other assets against them, and keep your exposure to the coins you believe in. It sounds like the best of both worlds — and for careful borrowers it can be useful.

It also has a mechanism that has wiped out more crypto holders than almost any hack: liquidation. Understanding it before you borrow is the difference between a tool and a trap.

How a crypto loan works

Most crypto loans are over-collateralised: you must deposit more value than you borrow. Deposit $10,000 of ETH, and you might be allowed to borrow $6,000 of stablecoins.

Two numbers define the loan:

• Loan-to-value (LTV): what you've borrowed divided by your collateral's value. $6,000 against $10,000 is 60%.
• Liquidation threshold: the LTV at which the lender may sell your collateral to repay the loan — say 80%.

There's no credit check and no repayment schedule. The loan stays open as long as your collateral is worth enough, and you pay interest that accrues continuously.

What liquidation is

Your loan is fixed in dollars; your collateral's value isn't. If ETH falls, your LTV rises. In the example above, a drop of 25% in ETH takes the collateral to $7,500, and your $6,000 loan is now at 80% — the liquidation threshold.

At that point, part or all of your collateral is sold, usually at a discount, to repay the debt. In decentralised protocols this happens automatically: anyone can trigger the liquidation and collect the discount as a reward. You don't get a phone call or a grace period. You keep the borrowed money, but you lose collateral — often more than the amount needed to cover the shortfall, because of the liquidation penalty.

Why liquidations cascade

Liquidations can feed on themselves. When prices fall quickly, many loans hit their thresholds at once, and the collateral sold into the market pushes prices down further, triggering more liquidations. That's why sharp crypto sell-offs are often followed by headlines about record liquidations.

Network congestion makes it worse: fees spike exactly when borrowers are trying to add collateral or repay, and some transactions arrive too late.

Where the price comes from

A protocol decides your LTV using a price feed. If that feed is manipulated, stale or based on a thin market, you can be liquidated at a price that doesn't reflect reality — or the protocol can be drained by someone exploiting the same weakness. How oracles work is worth understanding before you trust a protocol with your collateral.

DeFi lending vs centralised lending

• DeFi protocols run on smart contracts. Rules are public, liquidations are automatic, and your collateral sits in contracts you can inspect — with contract, oracle and governance risk instead of company risk.
• Centralised lenders hold your collateral themselves. Several large ones collapsed in 2022 after lending customer collateral onward, leaving depositors as creditors in bankruptcy. That's a custodial failure mode, not a market one.

Borrowing more safely

• Keep LTV low. Borrowing 25–30% against volatile collateral leaves room for large price drops; borrowing near the maximum leaves almost none.
• Know your liquidation price and watch it, not just the loan amount.
• Keep a reserve of stablecoins or collateral you can add quickly if prices fall.
• Set alerts, since protocols won't warn you.
• Understand the penalty, the interest model and the oracle the protocol uses.
• Revoke approvals you granted to lending contracts when you're done — token approvals don't expire on their own.
• Don't borrow to buy more of the same asset unless you fully accept that a drop can wipe out the position.

Loans and SSP

SSP doesn't offer loans. If you use a lending protocol through WalletConnect, your SSP vault behaves like any other wallet to the protocol, and every deposit, borrow, repayment and approval needs confirmation on both SSP Wallet and SSP Key.

That second approval protects you from someone else using your wallet. It doesn't protect you from the market. Once collateral is in a lending contract, the contract's rules — including automatic liquidation — apply, whatever device holds your keys.

The honest summary

Crypto loans let you borrow without selling, but your collateral can be sold for you — automatically, at a discount, and fastest when markets are worst. Most liquidation losses come from borrowing too close to the limit.

Keep your loan-to-value low, know your liquidation price, keep a reserve, and check where the protocol gets its prices. Borrow as if a sharp drop will happen, because eventually one does.