Crypto lending 101: Comparing CeFi and DeFi

Crypto began with self-sovereignty and open networks. Borrowing against crypto, though, now spans two worlds. Centralized finance, shortened to CeFi, offers company-run lending with custodians, policies, and service desks. Decentralized finance, or DeFi, offers protocol-run lending with smart contracts, oracles, and public telemetry. The tension is familiar. Minimize intermediaries or maximize convenience. Verify on-chain or rely on institutional controls. This piece compares how each model handles custody, pricing, liquidations, transparency, and recourse so you can choose the structure that fits how you actually use crypto, whether you want a crypto-backed loan or a path toward a crypto mortgage.

Centralized vs decentralized crypto lending: what’s the difference

CeFi lending means a specific company originates and services the loan, sets credit policy, and supervises risk with an off-chain system. Pledged collateral is held with a qualified custodian or within the platform’s custodial framework under segregation, audit, and insurance standards. You interact with a counterparty that can provide disclosures, support, and a legal venue for disputes.

DeFi lending means a protocol’s smart contracts hold collateral and enforce rules automatically. Parameters such as collateral factors and utilization curves are visible on-chain and can be adjusted through governance. Prices reach the protocol via oracles. There is no help desk. Recourse is governance and code.

In short: CeFi centralizes control behind institutional safeguards. DeFi decentralizes enforcement to code you can inspect.

Who controls collateral and keys

In CeFi, once assets are pledged they sit with a custodian or the platform under audited controls. That can include segregated wallets, role-based access, HSMs, and insurance coverage. You give up unilateral control of pledged assets in exchange for structured processes, human service, and institutional protections.

In DeFi, the smart contract is the custodian. After you deposit, contract logic decides movement. If the contract is immutable, rules are strict. If admin keys or timelocks exist, governance can pause or upgrade according to the published process. There is no “self-custody” of pledged collateral in the purest sense, because the contract, not your wallet, controls it. The trade is transparency and programmability for the obligation to monitor positions and understand protocol risks.

How rates and fees are set

CeFi prices loans using credit policy and market inputs: cost of capital, liquidity, borrower profile, and collateral type. Updates follow market data, often within policy bands that smooth day-to-day noise. Fees typically include origination, custody, and release, plus standard network costs.

DeFi prices are parameterized. Utilization curves adjust rates as supply and demand change. Governance can modify reserve factors and collateral parameters. Fees include protocol charges and gas. Results can be more elastic and can pass volatility through faster.

For borrowers: CeFi tends to prioritize stability and service. DeFi prioritizes transparency and speed.

Liquidations and LTV in practice

CeFi monitors LTV off-chain using aggregated price feeds. Rules govern outcomes, but discretion exists. Platforms commonly provide alerts and cure windows to post collateral or reduce balance. Some maintain circuit breakers during dislocations to manage operational risk.

DeFi enforces thresholds by code. When a position crosses a limit, liquidators are incentivized to repay debt and seize collateral at a discount. Execution is automatic once conditions trigger. Slippage, congestion, and price gaps can affect recoveries, so active monitoring matters.

Transparency, rehypothecation, and auditability

CeFi provides statements, audits, and security attestations, though not full real-time wallet visibility. Ask whether assets are segregated or pooled, whether rehypothecation is permitted, and which audits and insurance are current.

DeFi is transparent by default. Positions, parameters, and liquidations are visible on-chain. Code and governance introduce different risks: upgrade paths, admin permissions, oracle manipulation, bridge exposure. Multiple audits, bug bounties, and timelocks help but do not eliminate risk.

Regulation, recourse, and taxes

CeFi operates with KYC, disclosures, and defined venues for dispute resolution. You know the counterparty and jurisdiction. That provides a path to resolution, even if outcomes depend on contract terms.

DeFi offers permissionless access and global reach. Recourse is governance and code. If a parameter behaves as designed, there is no traditional complaint channel.

Tax points cut across both. Interest and forced sales can be taxable events. Some protocols require wrapped assets to interact with contracts; depending on jurisdiction and facts, wrapping or unwrapping can create a taxable event even if no liquidation occurs. Meticulous records matter.

Bottom line

CeFi and DeFi are different answers to the same question: how to turn crypto into credit. The right choice depends on what you value most on day one and during stress. If you want institutional custody, service, and defined cure windows, centralized lending fits. If you want permissionless access, on-chain transparency, and rules that execute as written, decentralized lending fits.

Many borrowers blend the two. Use CeFi for larger tickets, fiat rails, and audited safeguards. Use DeFi for speed, global access, and programmability. Keep pledged collateral and unpledged assets separate, document everything, and price the full package, not just the headline APR.

Before you commit, model the edge cases. Test how a rapid drawdown would impact your LTV, how quickly rates can move, and exactly what happens to collateral under each structure. Then, choose the path or mix that aligns with how you actually manage a crypto loan or crypto mortgage today.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.