Guide to decentralized finance (DeFi) Bitcoin loans including Aave, Compound, and other protocols.
DeFi (Decentralized Finance) Bitcoin loans allow you to borrow against your Bitcoin using smart contracts instead of traditional intermediaries. These non-custodial protocols offer transparency, no KYC requirements, and algorithmic interest rates, but require technical knowledge to use safely.
What Makes DeFi Loans Different
DeFi loans fundamentally differ from CeFi loans in several ways: (1) Non-custodial - you maintain control of your private keys until depositing into a smart contract, and you can withdraw immediately upon repayment, (2) Permissionless - no KYC, no approval process, anyone with crypto can participate regardless of location or identity, (3) Transparent - all transactions and protocol rules are visible on the blockchain, (4) Algorithmic - interest rates and liquidations are handled by code, not humans, (5) Composable - DeFi protocols integrate with each other, allowing complex strategies, and (6) Trustless - you trust the code (assuming it's audited) rather than a company. The tradeoff is complexity: you need to understand gas fees, wallet management, smart contract risks, and blockchain transactions. There's no customer support if you make a mistake.
Wrapped Bitcoin (WBTC) and BTC on Ethereum
Most DeFi lending happens on Ethereum, but Bitcoin is native to its own blockchain. To use Bitcoin in Ethereum-based DeFi protocols like Aave or Compound, you need wrapped Bitcoin (WBTC), which is an ERC-20 token representing Bitcoin at a 1:1 ratio. To get WBTC: you send Bitcoin to a custodian (like BitGo), who mints an equivalent amount of WBTC on Ethereum and sends it to you. When you want your Bitcoin back, you redeem WBTC for Bitcoin. While this introduces custodial risk (you're trusting the WBTC custodian), WBTC is backed by real Bitcoin reserves that are regularly audited and verified on-chain. Alternative wrapped Bitcoin options include renBTC (Ren Protocol) and tBTC (Threshold Network), each with different trust models. Check the current reserves and audit status before choosing a wrapped Bitcoin solution.
Aave: Leading DeFi Lending Protocol
Aave is the largest DeFi lending protocol with over $10 billion in total value locked. To borrow against Bitcoin on Aave: (1) Obtain WBTC by wrapping your Bitcoin, (2) Connect your wallet (MetaMask, Ledger, etc.) to the Aave app, (3) Deposit WBTC as collateral, (4) Borrow stablecoins (USDC, DAI, USDT) or other assets against your collateral. Aave offers up to 70% LTV on WBTC with variable interest rates based on supply and demand (typically 2-10%). Liquidation occurs at 82.5% LTV with a 5% liquidation penalty. Aave features include: flash loans, rate switching (variable to stable), aTokens that earn interest on collateral, and governance by AAVE token holders. Gas fees on Ethereum can be high ($20-$100+ per transaction), so factor this into your cost calculations, especially for smaller loans.
Compound: Simple DeFi Borrowing
Compound is a pioneering DeFi protocol known for its simplicity and transparency. The process is similar to Aave: deposit WBTC collateral, borrow stablecoins or other assets. Compound offers up to 70% LTV with algorithmic interest rates that adjust based on utilization rates (typically 3-12% for stablecoins). Liquidation occurs at 75% LTV with a 8% liquidation penalty. Key features: cTokens that represent your deposited assets and accrue interest, straightforward governance model, and extensive integrations with other DeFi protocols. Compound's interface is somewhat less polished than Aave's, but it's battle-tested and reliable. Like all Ethereum-based protocols, you'll pay gas fees for transactions. Compound is ideal for users who want a proven, straightforward DeFi borrowing experience without complex features.
MakerDAO: Borrow DAI Against Bitcoin
MakerDAO allows you to borrow DAI (a decentralized stablecoin) against WBTC through "vaults" (formerly called CDPs). MakerDAO requires higher collateralization - typically 150% or more (meaning maximum 66% LTV) - making it more conservative than Aave or Compound. You mint new DAI against your collateral rather than borrowing from a pool. Interest is charged as a "stability fee" which varies based on DAO governance decisions (typically 0.5-6%). Liquidation occurs at about 130% collateralization with a 13% penalty. MakerDAO appeals to users seeking: maximum decentralization (it's one of the oldest and most decentralized protocols), exposure to DAI specifically, and long-term borrowing with predictable stability fees. The higher collateral requirements mean less leverage but more safety.
DeFi Risks and Safety Considerations
DeFi protocols introduce specific risks to understand: (1) Smart contract risk - bugs or exploits in the code could result in loss of funds. Mitigate by using well-audited, battle-tested protocols, (2) Oracle risk - protocols rely on price feeds (oracles) to determine asset values. Oracle manipulation or failure can cause improper liquidations, (3) Liquidation risk - DeFi liquidations are often more aggressive than CeFi with higher penalties, (4) Gas price risk - during network congestion, gas fees for adding collateral might be too high to prevent liquidation, (5) Regulatory risk - DeFi regulations are evolving and could impact protocol operations, and (6) UI risk - phishing sites and fake interfaces are common. Always verify you're on the official site. To manage these risks: start with small loans to learn the protocol, use hardware wallets for large amounts, maintain conservative LTV ratios (40-50% max), monitor gas prices and have alternate plans if fees spike, and use monitoring tools like Margin Watch that track your DeFi positions.
Calculate Your Liquidation Price
Use our free Bitcoin liquidation calculator to see your exact risk level and liquidation price based on your loan details. Includes bear market scenarios and safety margin analysis.
Open Calculator →Protect Your Bitcoin Loan with Margin Watch
Don't just learn about loan risks - actively monitor and prevent them. Margin Watch tracks your LTV 24/7, sends instant alerts, and provides 14-day risk outlooks.
Frequently Asked Questions
Is DeFi safer than CeFi for Bitcoin loans?
DeFi and CeFi have different risk profiles rather than one being universally safer. DeFi eliminates counterparty risk (the platform can't freeze your funds or become insolvent) but introduces smart contract risk (code bugs or exploits). CeFi eliminates smart contract risk but introduces counterparty risk. Choose based on your risk comfort: if you trust code more than companies and have technical skills, DeFi may be better. If you prefer customer support and simpler interfaces, CeFi may suit you better. Many users split between both to diversify risk.
Can I use native Bitcoin in DeFi or do I need WBTC?
Most Ethereum-based DeFi protocols require wrapped Bitcoin (WBTC, renBTC, or tBTC) because Bitcoin doesn't exist natively on Ethereum. However, some Bitcoin-native DeFi solutions are emerging using Bitcoin's Lightning Network or sidechains like Rootstock (RSK) and Stacks. These are less mature but allow you to use native Bitcoin without wrapping. For now, WBTC on Ethereum remains the primary way to access established DeFi lending protocols. Always verify the reserves backing any wrapped Bitcoin before use.
What are gas fees and how do they affect DeFi loans?
Gas fees are transaction costs on Ethereum and other blockchains, paid to miners/validators for processing your transactions. Every DeFi action - depositing collateral, borrowing, repaying, adding collateral - requires a separate transaction with its own gas fee. Gas fees fluctuate based on network congestion, ranging from $5 to $200+ per transaction during peak times. This makes DeFi loans more expensive for smaller amounts and can create emergencies: if you need to add collateral during liquidation but gas fees are $100 and you're trying to save a $1,000 position, the economics may not work. Monitor gas prices and factor them into your loan strategy. Consider using Layer 2 solutions like Polygon or Arbitrum that offer lower fees.
Can I get liquidated while sleeping with a DeFi loan?
Yes, DeFi liquidations are algorithmic and automatic - they execute the moment your LTV crosses the threshold, regardless of time of day. If Bitcoin drops sharply at 3 AM, you could be liquidated before you wake up. This is why monitoring tools like Margin Watch are crucial for DeFi loans - they watch your positions 24/7 and send immediate alerts when you're approaching danger zones, giving you a chance to respond. Always maintain conservative LTV ratios and set up multiple alert thresholds well before liquidation levels to give yourself reaction time.
Are DeFi interest rates better than CeFi rates?
DeFi rates are often lower than CeFi during periods of low borrowing demand because DeFi protocols operate with lower overhead costs and pass savings to users. However, DeFi rates are variable and can spike dramatically during high demand periods or market volatility. CeFi rates are typically higher but fixed, providing certainty. Calculate the total cost including gas fees: multiple $50 gas transactions can quickly offset DeFi's rate advantage for smaller loans. DeFi's algorithmic rates mean you might pay 3% one month and 12% the next, while CeFi locks in 8% for the entire term. Choose based on your loan size, duration, and tolerance for rate variability.
Related Resources
No KYC Loans
How to get Bitcoin loans without identity verification - privacy-focused options.
Liquidation & Margin Calls
Understanding liquidation risks, margin calls, and how to protect your Bitcoin collateral.
Loan Calculator
Calculate your Bitcoin loan terms, LTV ratios, interest costs, and liquidation risks.
