Off-chain vs on-chain loans: what's the difference?
Off-chain vs on-chain loans: what's the difference?
Both are loans: someone borrows money and pays it back with interest. The difference is where the loan lives and what stands behind it.
On-chain loans
An on-chain loan is made and enforced by a smart contract. The borrower deposits crypto as collateral, usually worth more than the loan, and borrows against it. If the collateral's value falls too far, the contract sells it automatically to repay the lender. Everything, the collateral, the loan and the repayment, is visible on the blockchain.
Off-chain loans
An off-chain loan, also called an RWA loan, is made to a real business or person under ordinary contract law. It's backed by things like invoices, equipment, property or the borrower's future revenue. Repayment comes from the borrower's business, and if something goes wrong, recovery runs through legal agreements and the courts, not code.
Side by side
- Who borrows: on-chain, often traders and crypto firms; off-chain, real-economy businesses.
- What backs it: on-chain, crypto collateral; off-chain, real assets and cash flows.
- Where the return comes from: on-chain, demand for crypto leverage; off-chain, business activity.
- How it's enforced: on-chain, automatic liquidation; off-chain, legal agreements and collections.
- What you can see: on-chain, everything on the ledger; off-chain, only what's reported, unless it's verified.
Why the last point matters most
On-chain loans are transparent by default but tied to the crypto market. Off-chain loans are tied to the real economy but, traditionally, hard to see into. Bringing off-chain loans to on-chain investors only works if that visibility gap is closed: the loan, the borrower and the repayments have to be verified, not just described.
Related: What is an off-chain loan? and What is a lending protocol?.