Crypto-Backed Lending Beyond DeFi: How an Onchain Allocator Funds Offchain Loans

Crypto-backed lending is DeFi’s killer credit product. As of https://cryptobriefing.com/galaxy-crypto-lending-q2-2026-decline/, DeFi lending supported over $20B in loans outstanding. Through lending protocols like Morpho and Aave, onchain lending is a seamless experience of transparent rates, automated risk management, and several-second execution speeds.

But DeFi only represents half of the crypto-backed lending market. A parallel offchain market, with $23B of loans outstanding (as per the same Galaxy report), still runs the “traditional” way. This market features bilaterally negotiated loans with fixed rates and terms, margin calls instead of instant liquidations, and the protections of an executed loan agreement. These features garner a premium from borrowers, who pay higher rates in offchain lending transactions.

Grove’s financing facilities, including a recent $500M warehouse with Galaxy, are a bridge between these two markets. Each pairs a traditionally structured warehouse with stablecoin funding and real-time reporting. The result allows us to source capital from Sky and lend it to offchain originators like Galaxy, at a premium to prevailing DeFi rates.

We see this as a durable opportunity rather than a one-off trade. These warehouse facilities are how Grove expresses our view, allowing us to capture the spread between onchain funding costs and offchain loan yields with customized structural safeguards that protect each allocation.

1. Offchain Borrowers as a Distinct Market

Onchain loans are a strong fit for borrowers who value speed, transparency and permissionless access. This includes DeFi-native funds, trading firms, and a growing number of retail users, whether they borrow directly via protocol front ends or through in-app integrations like those offered by Coinbase.

Offchain borrowers are just as varied, ranging from bitcoin miners, funds, and corporate treasuries to high-net-worth individuals and retail borrowers. An ecosystem of lenders has developed to serve different segments of this population, from prime brokerage-style institutional desks to fintech consumer originators.

DeFi is not yet able to address what keeps these borrowers offchain. Some face regulatory, custody, or accounting constraints that rule out protocol exposure. Some won’t accept smart contract risk or automated liquidation in a fast-moving market. Others want what a lending desk provides: a known counterparty, negotiated terms and time to post more collateral.

2. Blue-Chip Crypto Collateral

Crypto-backed lending has been a foundational sector for Sky for nearly a decade. As MakerDAO, Sky began issuing DAI against ETH in 2017, managing a crypto-collateralized loan portfolio through every crypto market downturn since. Many banks, insurers, and investment managers treat crypto collateral as an exotic risk. But it’s a market the Sky ecosystem was born to serve.

Bitcoin makes the clearest case for crypto as collateral. By size and liquidity, it belongs alongside the largest single-name stocks in the world, which makes it well suited to margin lending. It has a market capitalization of https://www.coingecko.com/en/charts and has https://www.coinbase.com/price/bitcoin, with Bitcoin futures markets adding https://www.coinglass.com/currencies/BTC. And unlike any stock, it trades and settles around the clock, so collateral can be marked, margined, and sold at any hour. For a lender, that removes the overnight and weekend gaps that equity collateral stays exposed to.

3. Protections Built into Each Transaction

Tokenized RWAs (“real world assets”) have brought billions in offchain credit to DeFi, but the protections behind them vary widely. Some ask onchain capital to fund a “blind pool” of lender originations, with minimal controls over what gets funded. Grove’s warehouses are built with several layers of protection upfront:

• A Defined Buy Box. Each deal is explicit about collateral types, maximum loan-to-value ratio, terms, and borrower concentrations before any funding. Loans outside the prescribed box are ineligible and won’t be funded.
• Capital Beneath Ours. Grove’s origination partners provide first loss capital on top of the cushion from the borrower’s overcollateralization. This capital provides both loss protection and economic alignment between us and our partners.
• Separation and Security. The financed loans sit in a special purpose vehicle, off the originator’s balance sheet, and their collateral is held with qualified custodians. Together, these features are designed to protect Grove if the originator files for bankruptcy or can’t meet its obligations.
• Visibility and Triggers. Performance triggers can pause new funding if the portfolio weakens. Grove also receives loan-level reporting, giving us full transparency into the portfolio and the ability to audit what we finance.

This is a standard toolkit for TradFi asset-backed finance, and it’s what onchain capital should expect when it funds offchain loans. Grove’s team has spent years building warehouses and securitizations, and we’re here to bring that discipline onchain.

4. Scaling to $550M in Financing Facilities

Grove has financed two offchain lending businesses (Arch and Galaxy), each serving a different borrower segment. Both deals follow a similar design: the originator finds the borrower, underwrites the loan, and sends the collateral to a qualified custodian. Grove funds the loan in stablecoins through our financing facility. The originator then handles servicing and margin calls, and the borrower’s repayments flow back to repay Grove.

Galaxy CLO 2025-1 (Retail Borrowers): In December 2025, Grove https://www.prnewswire.com/news-releases/galaxy-announces-initial-closing-of-debut-tokenized-clo-at-75-million-302662045.html with a $50M investment. The CLO finances a credit facility to Arch Lending, a Galaxy Ventures-backed platform that issues overcollateralized consumer loans backed by digital assets.

Galaxy Warehouse Facility (Institutional Borrowers): In July 2026, Grove and Galaxy https://grove.finance/blog/grove-and-galaxy-digital-announce-usd500-million-warehouse-lending-facility. Galaxy originates, underwrites, and services loans to institutional borrowers, and Grove finances them in stablecoins. Borrower collateral is held with qualified custodians Anchorage Digital and BitGo. To date, Grove has extended $375mm in credit through the facility.

5. Partnering with Grove

Grove finances originators across fintech, specialty finance, and digital asset markets. That includes crypto lenders like Galaxy, but extends to consumer lenders, neobanks, and any platform integrating stablecoins and tokenization into their business.

Grove is built to be a differentiated capital partner for these businesses. We have billions in capacity to deploy from a credit line with Sky, at bank-like funding costs, and can size facilities to scale with our partners’ growth. We fund in stablecoins for intraday capital, and we underwrite protocols and digital assets that many traditional lenders won’t.

Every facility is customized for our partner’s financing needs, whether that’s repo, a warehouse, a securitization, or a loan sale arrangement. If you’re an originator building with digital assets, we’d like to hear from you: contact@grove.finance.