Lending Trust 

Why crypto lending is shifting to DeFi

About half of decentralised finance (DeFi) is collateralised crypto lending. In Q3 2025, sector volumes hit a record $73bn.

After the collapses of BlockFi, Celsius and Genesis, CeFi platforms lost their dominance as users shifted towards decentralised venues for depositing and borrowing crypto.

ForkLog examines the state of crypto lending and the challenges facing lenders.

Trust, betrayed

After the collapse of Terra and the ensuing bankruptcies of the largest centralised lenders, users became markedly more cautious about platforms that require trusting a third party.

Despite the broader growth of crypto lending, CeFi platforms have not regained their former scale.

According to Galaxy Research, in Q3 2025 loan volumes on centralised venues rose 37.11% quarter-on-quarter. The $24.37bn achieved is still 34.3% below the ATH recorded in Q1 2022.

The market leader remains Tether, with an open loan book of $14.6bn and a 59.91% share. Nexo ($2.04bn) and Galaxy ($1.8bn) round out the top three.

The USDT issuer pursues a diversified presence across sectors, including building gold reserves and investing in US Treasuries. Despite borrowing being ancillary to its business, the company has grown its market share by investing in Ledn, a top-ten crypto lender.

Surviving CeFi platforms have tightened policies. They now resemble bank vaults—regulated businesses leaning on rigorous risk management.

From 1 July 2025, Ledn sharply narrowed its earning channels, removing Ethereum from its product line and shutting interest accounts for deposited BTC.

Such steps help the sector stay afloat, gradually restoring institutional trust.

A tilt to decentralisation

Galaxy Research estimates total crypto loans reached a record $73.59bn in Q3 2025, more than 6% above the previous peak at end-2021.

The main driver was the expansion of on-chain lending across DeFi protocols.

Analysts say the decentralised share rose to 66.9%, up from 48.6% at the top of the 2021 cycle.

Total DeFi loans reached $40.99bn, up 54.84% quarter-on-quarter.

Growth was fuelled by points-incentive schemes, rising prices for Bitcoin, Ethereum and Solana, and more efficient collateral types such as Principal Tokens on Pendle.

By Q3, DeFi saw a marked shift: over 80% of volume flowed to lending protocols such as Aave, Morpho and Fluid. The share of stablecoins minted against collateral—led by DAI—fell to 16%, from 53% in 2021.

Code-governed platforms like Aave and Compound require collateral that exceeds the loan, eliminating most of the credit risk that felled CeFi.

Automated smart contracts remove the counterparty from transactions—an anathema to the most conservative institutions.

Galaxy Research finds lending is the largest DeFi category across blockchains, with Ethereum the clear leader. As of 31 March 2025, $33.9bn of assets sat on 12 EVM-compatible chains, with another $2.99bn on Solana. Ethereum L1 held 81% of all deposits.

Aave V3 on Ethereum is the largest lending market, with $23.6bn deposited at the time of the report. The most in-demand assets are stablecoins and unstaked ETH.

In the view of Aave founder Stani Kulechov, cuts in central-bank rates will create favourable conditions for DeFi to deliver higher yields.

“We have built a truly powerful infrastructure. We are now moving to the stage where DeFi can integrate into the broader fintech ecosystem, distributing yield,” Kulechov said at TOKEN2049 in Singapore in October.

Another lender, Maple Finance, blends CeFi+DeFi strategies. It seeks institutional flows by expanding to chains with fast transactions and ample cross-chain liquidity, while complying with KYC/AML norms.

In 2025, to serve large trading firms, Maple integrated Solana, Arbitrum and Plasma.

In October, co-founder Sid Powell set out his view of institutions’ role in crypto lending:

“The role that, in our view, they will play in collaboration with us will be more on the borrower side, as well as in distributing funds into syrupUSDC vaults. We have seen that this has already largely happened when we launched Plasma. A number of institutional hedge funds allocated capital to this vault, and we are seeing more and more such funds raise capital from traditional investors.”

Regulators are also taking note. On 8 December, America’s Commodity Futures Trading Commission (CFTC) launched a pilot programme to use digital assets as collateral in derivatives markets.

The initiative sits under the GENIUS Act. Initially, the eligible collateral set includes bitcoin, Ethereum and the USDC stablecoin.

The programme allows futures commission merchants to accept these assets to margin clients’ positions.

Who benefits

Companies and individuals lend and borrow for several reasons:

• liquidity. Borrowers can raise funds without selling assets, preserving potential upside;
• yield. Lenders can earn passive interest on idle assets;
• leverage. Traders can enlarge positions using borrowed funds;
• hedging long exposure. Borrowing enables offsetting shorts to manage portfolio delta and trim directional exposure;
• short selling. Borrow assets to sell now and buy back cheaper later;
• operational finance. Firms can fund working capital needs.

Depending on the objective, the market offers ample options. DeFi outpaces centralised solutions here. Protocols like Aave offer dozens of venues for complex recursive strategies via wrappers such as wBTC and weETH.

Attractive on-chain strategies draw varied users. Chief groups include:

• individuals—from retail traders to ultra-high-net-worth holders who keep assets on-chain and need liquidity or yield. They can farm, tap investment opportunities, access funds for personal or emergency needs, and earn on idle balances;
• corporates. Firms use on-chain credit for instant, 24/7 liquidity to fund operations and smooth cash flows. For organisations willing to accept the risks, benefits include transparency of funds and relatively cheap financing;
• treasury operators. Professionals managing organisational reserves seek yield on idle assets, whether running DAO treasuries or traditional accounts. The draw is diversified income and the ability to monetise almost any asset.

In crypto, this is common practice among fund managers to boost returns on tokens they are reluctant to sell.

In February 2025, the non-profit Ethereum Foundation (EF) provided several lending protocols with $120m in ETH to increase returns on reserves.

Over a year, the organisation could earn roughly $1.5m at a 1.5% rate. EF sent:

• 30,800 ETH ($81.6m) to Aave;
• 10,000 ETH ($26m) to Spark;
• 4,200 ETH ($11.2m) to Compound.

Not all is well

On-chain lending carries many risks. The gravest can result in temporary or permanent loss of access—or loss of funds outright.

Galaxy Research highlights technology risks from smart-contract bugs and oracle manipulation or errors.

Examples:

• liquidity pools. A pool-contract exploit often drains users’ funds entirely;
• token-issuance contracts. These mint “vouchers” such as aTokens and cTokens that reflect a user’s deposits and debts. Vulnerabilities can let attackers seize assets or manipulate balances. That is how $197m was stole from Euler Finance;
• access-control contracts. Flaws in role systems can grant unauthorised control.

Manipulated or failing price oracles, which determine collateral and debt values, can also trigger wrongful liquidations.

On one Morpho market, a decimals error in the oracle inflated a token’s price. A user was able to post just $350 of collateral and borrow 230,000 USDC.

Design and governance choices pose risks, too. Parameters such as LTV must balance safety and capital efficiency. Too “hard” and a protocol loses competitiveness; too “soft” and it courts systemic risk.

Complexity multiplies failure points. The hack of Platypus Finance showed this when an attacker used LP tokens of an AMM to attack the USP stablecoin, whose issuance the same protocol backed.

Analysts also flag abrupt parameter changes or major version releases as periods of elevated loss risk.

The above are not the only challenges in crypto lending.

In 2025, DeFi protocols moved aggressively into tokenised private credit via RWA. As collateral, such assets import opacity and TradFi risks into DeFi.

This migration opens the door to “financial contagion”, whereby problems in weaker assets—such as corporate debt—pass directly into lending pools, echoing the triggers of 2022’s CeFi failures.

Alongside DeFi’s inherent volatility and liquidation risk, regulation remains unresolved. The European Union leads the way.

From 1 January 2026, the EU’s takes effect directive DAC8, implementing the CARF. In 2027, exchanges, brokers and custodians will begin reporting users’ transaction data to tax authorities.

The ramifications of MiCA in Europe are already visible in crypto lending.

According to SQ Magazine, in 2025 lending volumes in the EU fell 23% as tougher identification rules deterred anonymous participants. Some 78% of former users moved to regulated centralised platforms for clearer rules. The largest DeFi protocols lost an average 18% of their European user base.

Despite the hurdles, the sector is expanding—with decentralised platforms driving growth.