The choice between CeFi (Centralized Finance) and DeFi (Decentralized Finance) for Bitcoin loans is one of the most important decisions you'll make. Each approach has fundamental trade-offs around custody, convenience, risk, and control. This guide breaks down both options so you can choose confidently.
Understanding CeFi Bitcoin Loans
CeFi (Centralized Finance) means borrowing through a company that holds your Bitcoin:
**How it works:**
1. You deposit BTC to the platform's wallet
2. Platform holds custody of your collateral
3. You receive loan (USD, stablecoin, or bank transfer)
4. Platform monitors LTV and manages liquidation
5. Repay loan to receive collateral back
**Key characteristics:**
- **Custodial**: Platform controls your private keys
- **KYC required**: Identity verification mandatory
- **Customer support**: Help available when needed
- **User-friendly**: Simplified interfaces
- **Regulated**: Many operate under financial regulations
**Popular CeFi platforms:**
Ledn, Nexo, Unchained, Salt Lending
**Who CeFi is for:**
Users who prioritize convenience, want customer support, and are comfortable trusting established companies with their collateral.
Understanding DeFi Bitcoin Loans
DeFi (Decentralized Finance) means borrowing through smart contracts without intermediaries:
**How it works:**
1. You wrap BTC to WBTC (on Ethereum) or use native BTC DeFi
2. Connect wallet to protocol (no account creation)
3. Deposit collateral to smart contract
4. Borrow directly from protocol
5. Smart contract automatically manages position
6. Repay to retrieve collateral
**Key characteristics:**
- **Non-custodial**: You control your keys (sort of—see considerations)
- **No KYC**: Pseudonymous participation
- **No support**: Community help only
- **Technical**: Requires DeFi knowledge
- **Transparent**: All transactions on-chain
**Popular DeFi options:**
Aave, Compound, MakerDAO (require wrapped Bitcoin)
**Who DeFi is for:**
Technical users who prioritize self-custody, privacy, and are comfortable navigating DeFi without support.
The Trust Trade-off
The fundamental difference is WHO you're trusting:
**CeFi: Trusting a company**
- Trust that they won't misuse your collateral
- Trust that they remain solvent
- Trust their security practices
- Trust their liquidation fairness
**The 2022 lesson**: BlockFi, Celsius, Voyager all failed. Customer funds were frozen or lost. Trusting CeFi means accepting counterparty risk.
**DeFi: Trusting code**
- Trust that smart contracts work as intended
- Trust that no exploits exist
- Trust that governance is sound
- Trust wrapped Bitcoin custody (for BTC on Ethereum)
**The reality**: Multiple DeFi protocols have been hacked. WBTC requires trusting BitGo's custody. "Non-custodial" isn't perfectly trustless.
**Neither is risk-free**:
- CeFi can fail due to business failures
- DeFi can fail due to code exploits
- Both require some trust
Choose which risks you're more comfortable with based on your technical knowledge and beliefs about institutional vs. technical risk.
Practical Comparison
Side-by-side on key factors:
**Onboarding**
- CeFi: KYC required (days), simple UX
- DeFi: Instant (connect wallet), complex UX
**Rates**
- CeFi: Fixed rates, typically 6-15%
- DeFi: Variable rates, can be lower (3-10%)
**LTV Options**
- CeFi: Usually capped at 50-70%
- DeFi: Often up to 70-80%
**Liquidation**
- CeFi: Some grace period, customer contact
- DeFi: Automatic, instant when threshold hit
**Custody**
- CeFi: Platform holds your BTC
- DeFi: Smart contract holds your BTC (you hold keys to interact)
**Customer Support**
- CeFi: Yes, varying quality
- DeFi: None—community forums only
**Privacy**
- CeFi: Full identity required
- DeFi: Pseudonymous (wallet address only)
**Exit Process**
- CeFi: Repay, request withdrawal, wait
- DeFi: Repay, instant collateral return
Making Your Decision
Choose CeFi if:
- You want simplicity and support
- KYC isn't a concern for you
- You're new to crypto lending
- You want fixed, predictable rates
- You trust established companies over code
Choose DeFi if:
- You prioritize self-custody (understanding the trade-offs)
- Privacy/pseudonymity matters to you
- You're technically comfortable with DeFi
- You want potentially lower variable rates
- You distrust centralized entities more than smart contracts
**Hybrid approach:**
Some users split their loans:
- Main loan via CeFi for simplicity
- Smaller position via DeFi for learning/diversification
**Neither approach eliminates risk:**
Both require monitoring your position, understanding liquidation, and maintaining appropriate LTV. Margin Watch works with both approaches to keep you informed regardless of platform choice.
**The best choice is the one you understand:**
If DeFi is confusing, the "superior" self-custody doesn't help if you make mistakes. If CeFi company risk terrifies you, peace of mind matters. Choose what lets you sleep at night.
