With digital assets once more surging in 2025, both big firms and everyday investors are re-exploring the idea of borrowing against their coins rather than selling them. Coinbase has stepped back into this market, and analysts see the launch as evidence that crypto finance is growing up-even though wild price swings and tough regulations are never far away.
Data from The Block Research shows that more than $1 billion in loans tied to crypto collateral hit the market worldwide in the first quarter of 2025. That figure marks a noteworthy jump after the quieter years of 2022 and 2023, clearly pointing to renewed interest from traders, funds, and everyday users seeking quick liquidity. Stability in Bitcoin above the $60,000 line, combined with an influx of institutional capital, has pushed secured lending back to the center of decentralized finance discussions.
This article looks at what prompted Coinbase to re-enter lending, how its tie with Morpho DeFi marks a change in its playbook, and what today's borrowers and lenders need to know before committing funds. It will also map out the main risks involved and examine the protections the newest blockchain protocols put in place to guard both sides of the loan.
Understanding Bitcoin-Backed Loans
Bitcoin loans work much like a standard secured loan but swap physical collateral for digital coins, most often Bitcoin or Ethereum. Borrowers place their crypto with a lender or a smart contract and, in return, receive cash in dollars, USDC, or another stable token, usually backed by a 150-to-200 per cent collateral ratio. If prices slide and the collateral value dips under a preset level, automatic liquidation kicks in to shield the lender from losses.
Fresh interest in these crypto-backed loans springs from a pressing desire for capital efficiency. Both big funds and everyday investors want to unlock liquidity without triggering tax bills or parting with their holdings, so short-term loans offer an appealing middle ground. Research from crypto data firm Kaiko shows that in 2024, the average Bitcoin loan size grew 28 per cent year over year, partly because prices steadied and DeFi platforms adopted the service more broadly.
Market leaders are now laser-focused on reducing custodial danger and coding loan terms directly into smart contracts. By tying loan-to-value ratios to live volatility metrics and posting every detail on-chain, they aim to curb defaults and give users clear, tamper-proof proof of how much they owe.
Coinbase and Morpho DeFi: A New Partnership
Coinbase joined forces with Morpho DeFi in mid-2025, and the move turned a lot of heads in the world of institutional crypto lending. Instead of rolling out another closed, centralized loan desk, Coinbase chose to plug directly into Morpho’s on-chain layer, which quietly sits between users and the wider pool of DeFi lending markets.
Through this new link, verified institutional clients can borrow stablecoins against Bitcoin or Ethereum stored in Coinbase Prime, with Morpho’s smart contracts keeping watch over collateral, payout, and repayment. The setup neatly slots into the hybrid-custody trend, letting users borrow on-chain while their assets stay guarded by a platform they already trust.
At the heart of each loan sits the Morpho Blue modular engine that lets clients tweak terms such as interest rates, liquidation thresholds, and even governance roles. That level of control appeals to firms that must blend compliance with the flexibility DeFi offers. Rather than pooling all capital under a single risk banner, Morpho isolates risk by vault, a structure that richer allocators often find easier to price and qualify.
Right now, the program is aimed at large-market borrowers, yet the broader takeaway is hard to overlook: when DeFi operates within well-known risk limits, major financial players are ready to step onto decentralized rails.
Benefits for Borrowers and Lenders
For borrowers, the biggest upside is gaining cash without having to sell crypto. With the longer market outlook staying positive, unloading Bitcoin now could feel like trading away future profits. A loan that uses their coins as collateral frees up capital while still letting them ride any price rise.
Meanwhile, lenders gain peace of mind from over-collateralized deals and the speed of automated liquidations. Thanks to smart contracts, if the value of a borrower's backing drops, the system swiftly sells enough assets to pay them back-no messy collections or phone calls needed.
Interest rates on crypto-backed loans have narrowed to 6.1 per cent APY for stablecoin credit tied to BTC or ETH, data from DeFiLlama shows. That drop from 9.3 per cent in early 2023 tracks stronger market liquidity and calmer price action. Adding non-custodial routes alongside KYC-compliant choices makes borrowing possible even in places where banks rarely lend, widening the participant base.
Risks and Considerations in Crypto-Collateralized Lending
Even with tighter protocols and newer risk tools, crypto-lending backed by on-chain tokens still carries major weaknesses. Market swings sit at the top of the list. A steep drop in Bitcoin or Ether can set off a cascade of liquidations, replaying scenes from March 2020 and again during the Terra-Luna crash of 2022. Fast-moving downturns can hand borrowers losses far larger than the loans they took.
Protocol risks have not vanished either. While fresh code may look cleaner, exploits still pop up in smart contracts. Extensive audits and formal verification lower the odds, yet neither guarantees safety. On top of that, murky rules in places like the United States and parts of Asia leave legal questions hanging, a costly headache for institutional players who must pass stringent compliance tests.
Custodial centralization adds another layer of danger. Even a structure like the Coinbase-Morpho model, which wraps loans in on-chain code, depends first on who's holding the assets and how their identities are checked. Those touch points, locked behind emergency switches or court orders, can become single points of failure or even open the door to regulatory liability.
Finally, the cost of being forcibly liquidated can hurt a lot more than just the amount of crypto sold. In many DeFi platforms, once a user slips under the collateral ratio, the assets are auctioned off at whatever bid comes first, and extra fees, slippage, and penalties pile on top of the loss. That math stings hardest for smaller, retail borrowers who rarely watch their wallets around the clock.
