Custodial lenders versus on-chain protocols: who holds your collateral, what they ask of you, how rates are set, and what can go wrong.
Intermediate
There are two families of bitcoin-backed loans. With a custodial lender, a company holds your collateral and lends you money under a contract. With an on-chain protocol, software holds the collateral and nobody approves you. Ledn and Unchained are well-known examples of the first. Aave is the best-known example of the second.
Careful: Borrowing against bitcoin can lose the collateral, with any lender on this page. This is education, not advice, and naming a lender here is not a recommendation. Read each lender's own terms before you send anything.
Good to know: Rates, minimum loan sizes, LTV limits and the countries or states each lender serves change often. This guide does not quote them. The live comparison is on the portal's Borrow page, and the final word is each lender's own website.
| Ledn | Unchained | Aave | |
|---|---|---|---|
| Type | Custodial lender | Custodial lender, shared keys | On-chain protocol |
| Collateral | Native BTC, held by the lender or its custodian | Native BTC in a multi-key vault, you hold one key | Wrapped BTC in a smart contract |
| Identity check | Yes | Yes | None by the protocol |
| Rate | Set by the lender | Set by the lender, fixed for the term | Variable, set by supply and demand |
| Can collateral be lent out | Depends on the loan type: read the terms | The lender says no | Yes, the pool lends it by design |
| If the price falls | Margin call, then liquidation | Call to add collateral or pay down | Automatic liquidation, no warning |
With Ledn you open an account, pass an identity check, and send native BTC as collateral. Ledn pays out the loan in dollars or a dollar token such as USDC. Approval is based on the collateral, not on a credit score. The collateral is held by Ledn or by a custody company it uses, so you are trusting a company and its contract. If the price falls, Ledn asks you to add collateral or repay, and liquidates if the LTV limit is crossed.
Ledn has offered different loan types over time. The point to check is whether your collateral is kept in segregated custody or may be lent out. Read the terms of the exact loan you are offered.
Unchained does custody differently. The collateral goes to a Bitcoin address that needs two of three keys to move. You hold one key, Unchained holds one, and an independent third party holds one. No single party can move the bitcoin alone, and you can see it on the network for the whole loan. Unchained states that the collateral is not lent out.
The trade-offs: you need your own hardware wallet to hold your key, there is an identity check, loans are aimed at larger amounts, and availability depends on where you live. Loans have a fixed rate and a fixed term. If the collateral falls below the required ratio, you are asked to add bitcoin or pay down the loan.
Aave is software running on Ethereum and other networks. There is no account and no application: you connect a wallet, supply collateral, and borrow. You keep your own keys throughout, and every balance is public and can be checked.
Rehypothecation is when a lender takes the collateral you posted and lends or pledges it to someone else to earn a return. It can make a loan cheaper. It also means that if the lender's own borrower fails, your bitcoin may not be there when you repay. Several lenders that did this failed in 2022. For any lender, look for a clear written answer to one question: can my collateral leave custody while my loan is open?