The risk of liquidation and profit balance in crypto exchanges

Passive income in the crypto system is an attractive way to earn, but behind it lies a complex financial mechanism that requires deep knowledge. Many investors place their assets on centralized exchanges hoping to generate returns, but often they do not realize what is happening behind the scenes with their money. The main question we want to present to all users is: what balance should we find between safety and the chance to earn profit?

The Mortgage Mechanism: How Exchanges Generate Revenue

Mortgage is the process in which a financial institution (bank or crypto platform) takes deposited assets from a client and uses them for its own purposes. In simple terms: you deposit funds, the exchange lends some of that money to another party and takes a commission from this process.

This mechanism remains familiar in traditional finance (TradFi), where it is well-regulated and overseen. However, in the crypto ecosystem, mortgage operates in a regulatory gray area. Recent crypto exchange insolvencies were directly related to unregulated mortgage practices.

Attractive Returns — and the Hidden Complex Operations Behind Them

When a platform offers 5% or more annual yield (APY), this is not “air from thin air.” The flow of funds is connected to a mortgage chain:

1. You (the depositor) deposit 1 BTC at 5% APY
2. The platform lends this BTC to a hedge fund or market maker at 8% interest
3. The platform pays you 5%, retaining 3% for itself

This profit is not in gold — it is hidden under government losses. The platform balances its liquidity to maximize efficiency, but this means your Bitcoin is not stored “cold” — it is in the hands of third parties.

Hidden Risks of Mortgage: What is the “House of Cards” Scenario?

The biggest risk in mortgage is that a failed party creates a “house of cards” effect, where the collapse of one link brings down the entire structure.

In 2022, the crypto market crashed. Celsius Network (a major lending platform) operated with high expenses on mortgage commissions. After the market’s sharp downturn, the platform could not provide enough liquidity to meet user withdrawals.

The liquidation of Voyager Digital was even more devastating. Voyager had hundreds of millions of dollars in assets lent to a hedge fund — Three Arrows Capital (3AC). When 3AC faced insolvency due to unregulated leverage, Voyager lost a billion dollars and became insolvent.

One Warning About Insolvency: What Happens if the Borrower Cannot Repay?

The essence of mortgage is that the depositor faces only first-level risk. If the borrower (the third party) cannot repay the loan:

1. The borrower becomes technically defaulted
2. The mortgage platform cannot recover your funds
3. You depend on the financial health of the organization, which you may not even be aware of

In traditional brokerage accounts (e.g., in the US), the maximum mortgage limit is set (140% of the loan balance) and insured (SIPC). In the crypto world? Regulations are minimal or nonexistent.

Balancing Safety and Profit: Three Critical Decisions

Mortgage always involves two sides. On one hand, it provides the liquidity necessary for market functioning and allows users to earn from inactive assets. On the other hand, it involves systemic risks. Here’s what you should do:

1. Control Your Assets — Self-Managed Wallets

The most effective way to reduce mortgage risk is to keep your assets in a non-custodial crypto wallet. If you control your private keys, others cannot lend out your assets.

2. Read the Fine Print Carefully

Before using a mortgage platform, be sure to read their terms of service. Pay attention to any clauses related to “transfer of rights” or “your assets being lent, re-lent, or used as collateral.”

3. Check the Offered Yield — Spot the “Red Flags”

Be skeptical of very high yield offers. If a platform offers returns significantly above the market average, it often indicates risky mortgage strategies.

The Difference Between CeFi and DeFi: The “Black Box” vs. the “Open Sea”

In CeFi platforms (Celsius, Voyager, others), mortgage operations often remain opaque. You deposit your funds into a “black box” where you do not see who the counterparty is or what leverage is used.

In DeFi, the situation is different. Mortgage is more transparent: users can verify on the blockchain where their funds are being lent. However, DeFi carries its own risks — bugs in smart contracts can lead to vulnerabilities.

Conclusion: Your Balance, Your Responsibility

Approaching mortgage is not just about profits or risks. It’s about balancing — safety versus gains, security versus liquidity. Individual investors should consider their own risk tolerance when making decisions.

Remember the old saying: “If you don’t hold the keys, you don’t own the coins.” To protect yourself from mortgage risks, controlling your assets is the most important balance to find in modern crypto investing.