- Coinbase reinstates Bitcoin loans for US users.
- DeFi lender Morpho will facilitate lending behind the scenes.
- Coinbase eliminated its previous cryptocurrency-backed loan program in 2023.
Coinbase users can once again borrow against their Bitcoin directly through the exchange.
The new cryptocurrency-backed loans are available to U.S. customers, excluding New York State, and will be available in other jurisdictions over time.
Crypto lending, however, has a checkered history.
During the crypto winter of 2022, several multi-billion dollar crypto lending companies, including Celsius, Genesis, and BlockFi, went bankrupt, causing billions in losses and turning users and investors away from the idea.
Coinbase says its new cryptocurrency-backed loans are different from previous offerings.
The exchange itself does not facilitate loans, it is only an intermediary. The operation is instead powered by Morpho, a DeFi lending protocol with $3.7 billion in deposits.
Paul Frambot, CEO and co-founder of Morpho, said DL News its app’s customization makes it a good choice for Coinbase’s cryptocurrency-backed loans.
“Morpho allows companies like Coinbase to maintain complete control over the products they create,” he said. “It also eliminates the need to cede control or governance to third parties, such as DAOs.”
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Second attempt
This is not the first time Coinbase has offered its customers the ability to take out loans against their crypto.
Coinbase previously ran a program that allowed customers to borrow up to $1 million against up to 30% of their Bitcoin holdings.
But in July 2023, the exchange officially terminated the program following a complaint filed by the SEC the previous month alleging that Coinbase had operated as an unregistered broker, exchange, and clearing agency.
A Coinbase spokesperson said CoinDesk in May of the same year, the closure of Coinbase Borrow was due to a drop in demand.
The DeFi mullet
This development marks a major integration between a consumer-facing platform like Coinbase and the often complex world of decentralized finance.
DeFi protocols, whose code runs on decentralized blockchains like Ethereum, offer a range of financial services. But their poor user experience makes it difficult to navigate for most.
Thanks to Coinbase, users can now access one of the most popular DeFi services – overcollateralized lending – without having to maintain their crypto assets themselves or interact directly with the protocols.
With Coinbase users holding billions of dollars worth of Bitcoin, new cryptocurrency-backed loans could potentially inject a significant share into DeFi.
DeFi enthusiasts often call this idea of abstracting away the complexities of on-chain finance the “DeFi mullet” – a sleek consumer-facing interface on the front and the messy technical aspects of DeFi hidden on the back.
How do DeFi loans work?
In DeFi, there are no credit scores to help lenders evaluate borrowers. Instead, all loans are over-collateralized and the actions users can take are governed by hard-coded rules.
Borrowers post collateral under a loan protocol and then borrow another asset at a dynamic interest rate determined by demand for the borrowed asset.
Max Branzburg, vice president of product at Coinbase, said DL News that when users borrow USDC against Bitcoin, their collateral is automatically converted to cbBTC and transferred to the Morpho protocol.
CbBTC is a DeFi compatible version of Bitcoin issued by Coinbase. The token is an individual version of the top cryptocurrency, backed by coins held by the exchange.
Because DeFi loans are overcollateralized, borrowers do not default on them. Instead, the loan protocol allows their collateral to be liquidated. This means selling collateral to cover the cost of borrowed assets so that the protocol does not accumulate bad debts.
Liquidation can occur if the value of a borrower’s collateral declines or if interest rates rise too high.
Although Coinbase offers loans and covers network fees, it does not protect users from liquidation.
“Customers will be responsible for the variable interest rates assigned to their loan,” Branzburg said.
Tim Craig is DL News’ DeFi correspondent based in Edinburgh. Contact us with advice at tim@dlnews.com.
