The State of Crypto Lending

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Introduction

Lending stands as one of the most market-aligned use cases for cryptocurrency, demonstrating robust growth both on-chain and off-chain. At its peak, the total market size reached an impressive $64 billion. The crypto lending market plays a vital role in building financial ecosystems around digital assets, enabling users to gain liquidity from their holdings. This liquidity can then be deployed within DeFi or used for trading on various on-chain and off-chain platforms.

This report provides a comprehensive examination of the on-chain and off-chain crypto lending landscapes. It is divided into two primary sections: the first reviews the market's development history, key participants, historical size (including both on-chain and off-chain activity), and pivotal moments for the sector. The second part offers a detailed analysis of how certain lending products and other leverage sources operate in both on-chain and off-chain environments, who uses them, and their associated risks. The report delivers a rare look into the size of the off-chain lending market, one of the most opaque segments in the industry's history.

Key Insights

Market Structure

Crypto lending services are primarily delivered through two channels: DeFi and CeFi, each with distinct characteristics and products. Below is a brief introduction to the forms of lending in both CeFi and DeFi:

  1. Centralized Finance (CeFi) – lending services for cryptocurrency and related assets provided by centralized, off-chain financial companies. Some of these entities utilize on-chain infrastructure, or their entire business may be built on-chain. CeFi lending can be broadly categorized into three types:

    1. Over-the-Counter (OTC) – bilateral transactions provided by centralized institutions, offering customized lending solutions and products. Terms of OTC arrangements can be tailored to the specific needs of both parties, including interest rates, duration, and loan-to-value ratios (LTV). These products are typically only available to qualified investors and institutions.
    2. Prime Brokerage – integrated trading platforms offering leveraged financing, trade execution, and custody services. Users can draw leveraged financing from prime brokers for other uses or engage in trading directly on the platform. Prime brokerage services typically support only a few crypto assets or crypto ETFs.
    3. On-Chain Private Credit – allows users to pool funds on-chain and deploy them via off-chain agreements and accounts. In this mechanism, the blockchain essentially becomes a crowdfunding and bookkeeping platform for off-chain credit需求. Debt is often tokenized, taking the form of CDP stablecoins or tokens directly representing a share in a debt pool. The use of raised funds is usually narrow in scope.

  2. Decentralized Finance (DeFi) – applications based on smart contracts running on blockchains, enabling users to borrow against cryptocurrency collateral, lend to earn yield, or obtain leverage for trading. DeFi lending operates 24/7, supports borrowing and lending against a wide variety of assets, and is fully transparent and auditable. Lending applications, CDP stablecoins, and decentralized exchanges enable users to achieve leverage on-chain.

    1. Lending Applications – On-chain applications allow users to deposit collateral (e.g., BTC or ETH) to borrow other cryptocurrencies. Loan terms are pre-set by the application's internal risk assessment based on the collateral and borrowed assets, operating similarly to traditional over-collateralized lending.
    2. CDP Stablecoins – Dollar-denominated stablecoins over-collateralized by a single cryptocurrency or a portfolio of assets. The principle is similar to over-collateralized lending, with the key difference being that users mint a synthetic asset against their collateral.
    3. Decentralized Exchanges – Certain DEXs allow users to obtain leverage to amplify their trading positions. While their functionality differs from CeFi prime brokerage, they play a similar role in providing leverage. However, borrowed assets on these DEXs are often not transferable off the exchange.

The period from late 2020 to early 2021 marked the beginning of 18 tumultuous months for the crypto lending market, filled with bankruptcies. This included the depegging and eventual collapse of the Terra stablecoin UST and its LUNA token, the depegging of the largest Ethereum liquid staking token, stETH, and the Grayscale Bitcoin Trust (GBTC) trading at a significant discount after years of sustained premiums.

Estimating Market Size

Based on quarter-end snapshots, the total size of the crypto DeFi and CeFi lending market remains significantly below its Q1 2022 peak. The primary reason is the lack of a significant recovery in the CeFi lending market following the 2022 bear market, coupled with the devastating impact on many of the largest lending institutions and borrowers. The following sections examine the changing size of the crypto lending market in CeFi and on-chain contexts separately.

According to Galaxy Research estimates, the total loan book of CeFi lenders (for which data is available) peaked at $34.8 billion and troughed at an estimated $6.4 billion (an 82% decline). As of Q4 2024, the total outstanding borrowings in the CeFi lending market were $11.2 billion, still 68% below the historical peak but up 73% from the bear market trough.

As the CeFi lending market has contracted over the past three years, the number of outstanding loans has become concentrated among fewer lenders. At the peak of the CeFi lending market in Q1 2022, the top three lenders (Genesis, BlockFi, and Celsius) held 76% market share, with $26.4 billion of the $34.8 billion in outstanding loans among the CeFi lender cohort. Today, the top three lenders (Tether, Galaxy, and Ledn) collectively maintain an 89% market share.

It's important to note distinctions between lenders when assessing market dominance, as not all CeFi lenders are the same. Some lenders only offer certain types of loans (e.g., BTC-collateralized only, altcoin-collateralized products, cash loans excluding stablecoins), serve only certain client types (e.g., institutional vs. retail), and operate only in certain jurisdictions. These factors inherently allow some lenders to scale more than others.

DeFi lending through on-chain applications like Aave and Compound has grown strongly from the bear market bottom, which saw open borrowing of $1.8 billion. By the end of Q4 2024, open borrowing across 20 lending apps and 12 blockchains reached $19.1 billion. This represents a 959% increase in observed open DeFi borrowing on these chains and applications over eight quarters since the bottom. The amount of outstanding loans through on-chain lending applications, as of the Q4 2024 snapshot, is 18% higher than the previous peak of $16.2 billion set during the 2020-2021 bull market.

DeFi lending has experienced a stronger recovery compared to CeFi lending. This can be attributed to the permissionless nature of blockchain-based applications and the fact that lending apps survived the bear market chaos that led to the downfall of major CeFi lenders. Unlike the largest CeFi lenders that went bankrupt and ceased operations, the largest lending applications and markets were not all forced to shut down and continue to operate. This fact is a testament to the design and risk management practices of large on-chain lending applications and the benefits of algorithmic, over-collateralized, and supply/demand-based borrowing.

The crypto lending market (excluding the market cap of crypto-collateralized CDP stablecoins) reached a peak total open borrowing of $48.4 billion at the end of Q4 2021. Four quarters later, the aggregate market reached a trough of $9.6 billion in Q4 2022, down 80% from the top. Since then, the total market has expanded to $30.2 billion, driven primarily by DeFi lending app expansion, representing a 214% increase based on the Q4 2024 end snapshot.

Note that there may be double-counting between the total size of CeFi loan books and DeFi borrowing figures. This is because some CeFi entities rely on DeFi lending applications to service off-chain client lending. For example, a hypothetical CeFi lender could use its idle BTC to borrow USDC on-chain and then extend that same USDC to an off-chain borrower. In this case, the CeFi lender's on-chain borrowing would appear in DeFi open borrowings and also on the lender's financial statements as open lending to its clients. A lack of disclosure and on-chain attribution makes filtering this dynamic difficult.

A notable evolution in the crypto lending market is the dominance of DeFi lending applications over CeFi venues as the market moved through the bear market and began recovering. During the 2020-2021 bull cycle, DeFi lending applications reached just a 34% share of total crypto lending, excluding the market cap of crypto-collateralized CDP stablecoins; as of Q4 2024, it commands 63%, nearly doubling its dominance.

Including the market cap of crypto-collateralized CDP stablecoins, the total size of the crypto lending market broke $64.4 billion in Q4 2021. At the bear market bottom in Q3 2023, the total size was just $14.2 billion, down 78% from the bull market peak. As of Q4 2024, the market has rebounded 157% from the Q3 2023 low, reaching a total size of $36.5 billion.

Note that, similar to borrowing via DeFi lending apps, there may be double-counting between the total CeFi loan book size and CDP stablecoin supply. This is because some CeFi entities rely on minting CDP stablecoins with crypto collateral to service off-chain client borrowing.

When including crypto-backed CDP stablecoins, the growing trend of on-chain lending market share becomes even more pronounced. As of the end of Q4 2024, DeFi lending apps and CDP stablecoins combined command 69% of the entire market. Their share has been on a steady upward trend since Q4 2022. A notable observation is the waning dominance of CDP stablecoins as a source of crypto-backed leverage. This is partly attributable to increased stablecoin liquidity, improved lending app parameters, and the introduction of delta-neutral stablecoins like Ethena.

Market Data Logic and Sources

The data for the DeFi and CeFi lending markets above was compiled from various sources. Data for DeFi and cDeFi is transparent and readily accessible via on-chain data, whereas obtaining CeFi data is more challenging and less available. This is due to inconsistencies in how CeFi lending platforms record outstanding loans, differences in the frequency of public information, and the general difficulty in accessing such information.

VC Investment and Crypto Lending

From Q1 2022 to Q4 2024, CeFi and DeFi lending/credit applications and platforms raised a total of $1.63 billion across 89 transactions with known funding amounts. The category raised the most in quarterly funding in Q2 2022, securing at least $502 million across eight deals. Q4 2023 saw the least funding, with just $2.2 million in total.

Credit and lending applications constitute only a small fraction of total venture capital invested in the crypto economy. From Q1 2022 to Q4 2024, credit and lending apps accounted for an average of just 2.8% of quarterly VC funding in the space. They captured their largest share of quarterly funding in Q4 2022 at 9.75%. In the most recent quarter, Q4 2024, they accounted for just 0.62% of the total funding.

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What Went Wrong?

The crypto lending market experienced a violent collapse in the second half of 2022 and early 2023, with some of the industry's largest players filing for bankruptcy in succession. Companies including BlockFi, Celsius, Genesis, and Voyager, at their peak, collectively accounted for 40% of the entire crypto lending market and 82% of the CeFi lending market. The downfall of these lending platforms was ultimately attributed to the broader crypto market crash, although risk management missteps and the acceptance of "toxic" collateral from borrowers exacerbated their troubles.

Crypto Market Crash and Its Impact on Collateral Value

The crash in asset prices was the primary factor forcing deleveraging in the crypto lending market. Excluding BTC, USDC, and USDT, the digital asset market cap lost nearly $1.3 trillion (77%) over the 406 days after the market reached its cycle high on November 9, 2021. This figure includes the wiping out of Terra's UST stablecoin's roughly $18.7 billion market cap and the total collapse of the LUNA token, valued at around $39 billion. This left collateral assets either worthless or difficult to dispose of amid vanishing liquidity, trapping borrowers in trades that were deeply underwater.

Grayscale's Bitcoin Trust and Liquid Staked ETH

The market downturn rendered collateral widely used by institutional borrowers "toxic." Notably, less liquid assets such as stETH, GBTC, and ASIC (Application-Specific Integrated Circuit) bitcoin miners accelerated the devaluation of these commonly used collateral types.

The issue with stETH and GBTC was that they did not allow investors to redeem their underlying assets: stETH for ETH and GBTC for BTC. At the time, the Ethereum Beacon Chain had not yet enabled staking withdrawals, preventing users from extracting locked ETH; GBTC, due to its product structure, also did not allow investors to redeem the BTC backing each share. This meant the secondary markets for stETH and GBTC bore the full brunt of selling pressure but with far less liquidity than their underlying assets. The result was these assets trading at a discount to their underlying assets, exacerbating the pressure on crypto asset collateral. stETH reached a discount as low as 6.25%, while GBTC's discount soared to 48.9%.

Bitcoin ASICs

A similar situation unfolded for loans to miners collateralized by Bitcoin ASIC machines. The problems with ASICs as collateral were twofold: 1) their value is directly tied to the BTC price and mining difficulty, and 2) the release of new, more efficient machine generations devalues older models. These factors, combined with the poor liquidity of the machines themselves, led to ASIC values falling more than bitcoin itself, and in some cases becoming impossible to dispose of.

Hash price is a measure of the estimated daily revenue per unit of hashing power (before mining costs) for an ASIC miner, typically quoted in dollars per TH/s or PH/s. For example, a machine with 0.1 PH/s of power would be expected to generate $10 per day (before operational costs) at a hash price of $100 per PH/s. This figure can be used to discount future revenue/profit, among other factors, to estimate the miner's value.

The hash price and mining difficulty plummeted during the 2022 bear market. When BTC reached its cycle high of $67,600 in November 2021, the hash price was $403 per PH/s, and the mining difficulty was approximately 21.7 trillion. Over the next 13 months, the bitcoin price fell 75% to around $16,600, and mining difficulty increased by 58%, causing the hash price—and the estimated revenue for ASICs—to fall by 86%. Note the 11% gap between the bitcoin price drop and the hash price drop, attributable to the rising mining difficulty. Increased difficulty means more competition among miners for a fixed daily bitcoin production, resulting in less overall BTC revenue per unit of hashing power. This mechanism was a key factor in the outsized drop in ASIC value.

The decline in revenue generated by ASICs negatively impacted their sale prices. The price per unit of hashing power for each class of machine, categorized by efficiency, fell between 85% and 91% from the cycle high to the BTC price bottom in December 2022. As a result, collateral used to back miner loans lost over 90% of its value in some cases. Notably, this chart shows only the most frequently used ASIC models for loans before and after the bear market.

Beyond the falling BTC price and rising difficulty, ASIC values faced other headwinds. New, more efficient models hit the market in 2021 and 2022, such as Bitmain's first sub-21 J/TH machine released in August 2022. This further pressured the value of older machines used as collateral, making them less competitive for mining.

Poor Risk Management

Compounding the issue, many prominent crypto lending platforms at the time suffered from significant risk management problems. While the industry has since begun to self-regulate in the absence of clear rules, including strengthening risk controls and due diligence, the absence or poor execution of risk management was a significant contributor to the digital asset meltdowns of 2022 and 2023.

Asset-Liability Mismanagement

Lending platforms pre-FTX collapse failed to properly manage their asset-liability liquidity. Many platforms lent long and borrowed short, expecting to be able to top up liquidity when needed. However, when large-scale recalls were necessary, platforms often lacked sufficient liquidity to meet demand. Borrowers were either deeply underwater and unable to repay or locked into long-term loans and unable to redeem immediately.

Credit Risk Mismanagement

Uncollateralized or under-collateralized lending was extremely common in the crypto market before the FTX collapse. For instance, it's estimated that up to 36.6% of Celsius's institutional loan book was uncollateralized, and BlockFi extended uncollateralized loans to FTX. The vetting processes at many lending platforms were also severely lacking, failing to adequately assess counterparty solvency and extending funds to borrowers with poor credit.

Weak Internal Risk Controls

The root cause of asset-liability mismatches and uncontrolled credit risk was weak internal risk control systems. Pre-FTX, many lending platforms lacked clearly defined risk parameters or standardized loan limits. These issues were often specific to corporate governance failures rather than an industry-wide ailment. Some lenders, while victims of the broad contagion of the 2022 crypto market collapse, had loan standards and controls in place that helped them weather the bear market.

What's Next for Crypto Lending?

As markets recover and crypto lending trends higher, several key developments are worth watching in the year ahead. Specifically:

Regarding CeFi Lending:

The entry of traditional institutions like Cantor Fitzgerald, major lenders, and banks into the market creates opportunities for accessing capital through established banking channels. This increases competition and lowers the cost of capital. This heightened competition and availability of lower-cost capital also enhance liquidity and the accessibility and scale of services, as these entities bring deep financial resources and robust market infrastructure to the space. These entities are motivated by their own interest while also being pushed into the crypto economy by regulatory measures. Most notably, the SEC's rescission of SAB-121 via the issuance of SAB-122 provides a tailwind for crypto lending, removing the requirement for public companies (many banks are public) to hold customers' digital assets on their own balance sheets. This SAB-121 requirement, combined with bank capital requirements, made it nearly impossible for banks to offer crypto custody, and by extension, related services like lending. Furthermore, the rise of US bitcoin ETPs has enabled mainstream lending desks to offer leverage and loans collateralized by ETPs, further expanding the crypto-related lending market.

Regarding On-Chain Private Credit:

Its future hinges on tokenization, programmability, utility, and the yield expansion it enables. The tokenization of off-chain debt introduces elements of transparency and automation not present in traditional debt instruments. Combined, these allow for better risk management, which increases lenders' risk appetite and lowers administrative costs, enabling lenders to move down the risk curve and capture more yield. Additionally, the utility of private credit tokens within the on-chain economy will expand, with use as collateral in lending applications or for minting CDP stablecoins likely being the first major on-chain use cases for these tokens.

Regarding DeFi Lending:

Its future lies in the expansion of the institutional user base and the building of centralized off-chain companies on top of lending application tech stacks. Rising institutional adoption stems from: 1) financial firms' growing familiarity with the risks of blockchain and on-chain applications; 2) the advantages off-chain businesses can gain by using on-chain platforms; 3) regulatory clarity for digital assets from major governments; and 4) the growing base of on-chain liquidity and total lending activity relative to off-chain. Furthermore, the building of centralized companies on lending application tech stacks is noteworthy. As these companies issue assets (e.g., private credit tokens) and move more of their business on-chain, they will likely want to leverage blockchain infrastructure to support the utility of the tokens and their operations. One example of this is Ondo Finance's Flux protocol, a fork of Compound v2, intended to support the utility of its OUSG treasury token.

Frequently Asked Questions

What is the main difference between CeFi and DeFi lending?
CeFi lending is facilitated by centralized companies off-chain, often offering customized services but introducing counterparty risk. DeFi lending operates through autonomous smart contracts on-blockchain, providing transparency, permissionless access, and algorithmic risk management, but carries smart contract and technological risks.

Why did the crypto lending market crash in 2022?
The market crash was primarily triggered by a massive downturn in crypto asset prices, which decimated the value of collateral backing loans. This was exacerbated by poor risk management practices at major lending firms, including significant exposure to uncollateralized lending and highly volatile, illiquid "toxic" collateral assets like stETH, GBTC, and Bitcoin ASIC miners.

Is my money safe in a DeFi lending protocol?
Safety depends on the specific protocol's smart contract audit history, the robustness of its risk parameters, and the liquidity of the assets you supply. While DeFi eliminates counterparty risk from a centralized entity, it introduces smart contract risk and potential liquidation risk if your collateral value falls sharply. Always conduct thorough research and understand the risks before depositing funds.

What are the advantages of using on-chain lending?
Key advantages include 24/7 availability, transparency into pool liquidity and rates, permissionless access without KYC, and often higher yields for suppliers. Loans are typically over-collateralized and managed by pre-defined, transparent algorithms, reducing the need for trust in a central intermediary.

How do I choose between a CeFi and DeFi lending platform?
Your choice depends on your priorities. CeFi may offer better user experience, customer support, and access to larger loans or institutional products but requires trusting the company with your funds. DeFi offers greater transparency, self-custody, and permissionless access but requires more technical knowledge to navigate smart contracts and manage wallet security.

What is a CDP stablecoin?
A Collateralized Debt Position (CDP) stablecoin is a type of stablecoin minted by users when they lock up cryptocurrency collateral in a smart contract (e.g., DAI, USDS). It functions similarly to taking out an over-collateralized loan, but instead of receiving a existing asset like USDC, you mint a new synthetic stablecoin against your collateral.

Conclusion

The evolution of the crypto lending market represents a significant milestone in the maturation of digital asset infrastructure. As this report has shown, the ability to lend and borrow has become a foundational pillar of both decentralized and centralized crypto finance, creating market mechanisms analogous to traditional financial systems while introducing novel technological innovations.

The dominance of lending protocols within the DeFi ecosystem underscores the fundamental importance of these services to the overall crypto economy. The autonomous, algorithmic nature of on-chain lending infrastructure establishes a new paradigm for market operation—one that functions continuously with transparency and implements programmed risk management. This technological framework represents a meaningful departure from traditional financial systems, potentially offering greater efficiency and reduced intermediary risk.

Looking ahead, the crypto lending market appears poised to enter a new phase of growth characterized by better risk management frameworks, greater institutional participation, and clearer regulatory guidance. The convergence of traditional financial expertise with blockchain-based innovation hints at a future where crypto lending services become increasingly sophisticated and reliable while maintaining the unique advantages of blockchain technology. As the sector matures, it may serve as a bridge between traditional finance and the emerging digital asset ecosystem, driving broader adoption of crypto financial services.