Rehypothecation

You deposit Bitcoin as collateral. The platform lends it to someone else. That's rehypothecation — your collateral is doing double duty, securing your loan and generating yield for the platform at the same time.

Borrowers care because it means their collateral isn't sitting in a vault. Lenders care because it's how CeFi platforms juice their returns — and how they create risk they don't always disclose.

How It Works

Say you deposit 1 BTC as collateral to borrow $30,000 USDC at 60% LTV. A non-rehypothecating platform holds that BTC and does nothing with it. A rehypothecating platform lends that same BTC to a short-seller, collects a lending fee, and pockets the spread.

The platform now has two obligations against one asset: return your BTC when you repay, and return it to the short-seller when they're done. As long as both don't demand it simultaneously, the math works.

The problem is "simultaneously" happens more than anyone plans for. In a market crash, borrowers repay loans, short-sellers close positions, and depositors withdraw — all at once. The platform can't honor every claim because the same asset was promised to multiple parties.

Why It Matters

Rehypothecation is the difference between a platform that holds your collateral and one that uses it. The yield difference might look small — maybe 1-2% APY. The risk difference is not small.

DeFi protocols like Aave don't rehypothecate in the traditional sense — the smart contract holds collateral on-chain and it's visible to anyone. CeFi platforms operate more like banks: they take custody of your assets and can use them however their terms of service permit.

What to Watch

Most CeFi platforms bury rehypothecation rights in their terms of service, not their marketing pages. The phrase to look for is "right to use" or "title transfer" — legal language that means they own your collateral outright once you deposit it. You become an unsecured creditor, not a secured one.