Trust Credit - ForkLog: cryptocurrencies, AI, singularity, the future

# Credit Trust

Why the crypto lending market is moving into DeFi

About half of the decentralized finance (DeFi) market is occupied by crypto-backed lending. In Q3 2025, the sector’s turnover reached a record $73 billion.

After the collapse of BlockFi, Celsius, and Genesis, CeFi platforms lost their dominance — user interest shifted toward decentralized platforms for crypto deposits and loans.

The current state of the crypto lending industry and the main issues facing lending platforms are covered in the new ForkLog article.

Betrayed Trust

Following the collapse of Terra and the subsequent bankruptcy of major centralized lenders, users have become much more cautious about platforms requiring third-party trust.

Key events in the history of crypto lending up to April 2025. Source: Galaxy Research. Despite the overall growth of the crypto lending segment, CeFi platforms have yet to return to previous levels.

According to Galaxy Research, in Q3 2025, the volume of loans on centralized platforms increased by 37.11% compared to the previous quarter. The achieved $24.37 billion is still 34.3% below the ATH recorded in Q1 2022.

Source: Galaxy Research. The market leader remains Tether with an open credit portfolio of $14.6 billion and a share of 59.91%. The top three also include Nexo ($2.04 billion) and Galaxy ($1.8 billion).

The issuer’s strategy for USDT is aimed at a distributed presence across many sectors, including increasing gold reserves and investing in US government bonds. Despite the secondary importance of the lending business, the company increased its market share by investing in the Ledn platform. Ledn is among the top ten crypto lenders.

Source: Galaxy Research. Surviving CeFi platforms have had to revise their policies. They now resemble more like banking vaults — regulated businesses betting on advanced risk management.

For example, Ledn significantly narrowed its earning channels from July 1, 2025, completely removing Ethereum from its product line and closing income accounts for deposited BTC.

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

Pursuit of Decentralization

According to Galaxy Research, in Q3 2025, the total crypto loan volume reached a record $73.59 billion, surpassing the previous peak at the end of 2021 by more than 6%.

The main growth driver was the expanding on-chain lending segment in DeFi protocols.

Analysts report that the share of decentralized solutions increased to 66.9% from 48.6% at the previous cycle’s peak in 2021.

Source: Galaxy Research. The total DeFi loan volume reached $40.99 billion, up 54.84% in the quarter.

The growth was significantly driven by incentive programs for point accumulation, rising prices for Bitcoin, Ethereum, and Solana, as well as the emergence of more efficient collateral types like Principal Tokens on the Pendle platform.

By Q3, there was a noticeable shift in DeFi: over 80% of the volume was from lending protocols such as Aave, Morpho, and Fluid. However, the share of stablecoins issued as collateral, with DAI being the largest, decreased to 16% from 53% in 2021.

Top 10 DeFi crypto lending protocols by borrowed amount. Source: DefiLlama. Managed code platforms like Aave and Compound require collateral exceeding the loan amount, eliminating most of the credit risks that undermined CeFi.

Automated smart contracts of decentralized platforms exclude counterparties from operations, deterring the most conservative institutional players.

According to Galaxy Research, lending is the largest category in DeFi across all blockchains, with Ethereum holding an unambiguous leadership. As of March 31, 2025, assets worth $33.9 billion are deployed across 12 EVM-compatible blockchains. An additional $2.99 billion is deposited in Solana. 81% of all deposits are concentrated on Ethereum L1.

Source: Galaxy Research. Aave V3 on Ethereum is the largest lending market, with $23.6 billion deployed at the time of the report. The most popular assets are stablecoins and unstaked ETH.

According to Aave founder Stani Kulechov, the reduction in interest rates by central banks will create favorable conditions for increasing yields in the DeFi sector.

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

Borrowed crypto on Aave V3 on Ethereum as of March 31, 2025. Source: Galaxy Research. Another player in the crypto lending market, Maple Finance, builds its strategy on integrating CeFi+DeFi approaches. The company aims to attract institutional interest by expanding to blockchains with fast transactions and high cross-chain liquidity, while complying with KYC/AML regulations.

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

In October, co-founder Sid Powell shared his vision of the role institutional players will play in the development of the crypto lending segment:

“The role, in our opinion, will be more on the borrower side, as well as in the distribution of funds in syrupUSDC vaults. We saw that this already happened to a large extent when we launched Plasma. Several institutional hedge funds allocated capital to this vault, and we see more and more such funds attracting capital from traditional investors.”

The sector also caught the attention of government agencies. On December 8, the US Commodity Futures Trading Commission (CFTC) launched a pilot program for using digital assets as collateral in derivatives markets.

The initiative is implemented under the GENIUS Act. In the first phase, Bitcoin, Ethereum, and USDC stablecoin were added to the list of permissible collateral assets.

The program allows futures commission merchants to accept these assets as collateral for clients’ margin positions.

Who Benefits

Companies and individuals participate in asset placement and lending for several reasons:

• Liquidity. Allows borrowers to raise funds without selling assets, maintaining potential for future growth;
• Yield. Provides lenders with the opportunity to earn passive interest on unused assets;
• Trading leverage. Traders can increase position size using borrowed funds;
• Hedging long positions. Reduces risk on existing longs by opening offsetting short positions, helping manage portfolio delta and reduce directional exposure;
• Betting on decline. Enables borrowing assets and selling them with the expectation of repurchasing at a lower price;
• Business financing. Allows companies to obtain liquidity for operational needs.

Depending on the specific borrowing or lending goal, the market offers a sufficient number of options. In this regard, DeFi significantly outperforms centralized solutions. Protocols like Aave offer dozens of placement options for complex re-lending mechanisms via wrapped tokens like wBTC and weETH.

Aave asset borrowing ranking. Source: Aave. Profitable on-chain lending strategies attract various user categories. Main among them are:

• Individuals — from retail traders to ultra-large capital holders who keep assets on-chain and need liquidity or yield. They can participate in farming and investment opportunities, obtain funds for personal needs and emergencies, and earn income on idle assets;
• Corporate users. Companies offering on-chain lending for instant, 24/7 liquidity to finance current operations and maintain stable cash flow. For organizations willing to accept such risks, advantages include transparency of fund movement and relatively cheap financing options;
• Treasury operators. Professionals managing organizational financial reserves aiming to generate income from idle assets, managing DAOs’ treasuries or traditional accounts. The benefit for such structures is diversification of income sources and the ability to earn from almost any assets.

In the crypto industry, this practice is popular and used by fund managers to increase token profitability, which companies are not eager to realize.

For example, in February 2025, the non-profit Ethereum Foundation (EF) provided several lending protocols with ETH worth $120 million( to boost reserve yields.

Over the year, the organization could earn about $1.5 million from this, based on a 1.5% rate. EF transferred:

• 30,800 ETH )$81.6 million( to Aave;
• 10,000 ETH $26 )million( — to Spark;
• 4,200 ETH )$11.2 million$197 — to Compound.

Not All Is Well

On-chain lending involves many risks. The most serious can lead to temporary or permanent loss of access to funds or their loss.

According to Galaxy Research, the main technological risks are related to smart contract vulnerabilities and manipulations or errors in oracles.

Examples:

• Liquidity pools. Hacking a pool contract often results in complete depletion of user funds;
• Token issuance contracts. Issue “vouchers” like aTokens and cTokens, which reflect user deposits and debts. Vulnerabilities allow attackers to misappropriate assets or manipulate balances. This is how Euler Finance was hacked for $350 million;
• Access control contracts. Errors in role systems can give attackers unauthorized control.

Additionally, manipulations and failures in price oracles, which determine collateral and debt values, threaten incorrect liquidations.

For example, on one Morpho market, an oracle decimal error led to an overestimated token price. As a result, a user was able to provide only collateral and borrow 230,000 USDC.

Protocol design and management risks also pose threats. Parameters like LTV must balance safety and capital efficiency. If too “strict,” the protocol loses competitiveness; if too “soft,” systemic risks are created.

Application complexity also increases points of failure. This was clearly demonstrated by the Platypus Finance hack, where an attacker used LP tokens from an AMM to attack the stablecoin USP, which was issued by the same protocol.

Experts also point to sharp parameter changes or new application versions. In such cases, the risk of funds loss increases.

The listed problems are not the only ones in the crypto lending sector.

In 2025, DeFi protocols actively integrated tokenized private credit via RWA. As collateral for loans, such assets transfer opacity and risks from TradFi into DeFi.

Migration creates the possibility of “financial contagion,” where problems with weak assets like corporate bonds could directly transfer into lending pools, repeating the causes of the 2022 CeFi giants’ collapse.

Along with the inherent volatility and liquidation risks of DeFi, regulation remains an unresolved issue. The European Union leads in this area.

Starting January 1, 2026, the EU will implement the DAC8 directive, which enforces the CARF regulatory initiative. In 2027, crypto exchanges, brokers, and custodial services will begin transmitting user transaction data to tax authorities.

The consequences of MiCA adoption in Europe have already affected the crypto lending sector.

According to SQ Magazine, in 2025, lending volume in the EU decreased by 23%, as stricter identity verification rules deterred anonymous participants. 78% of previous users switched to centralized regulated platforms for clearer norms. As a result, the largest DeFi protocols lost an average of 18% of their European user base.

Despite these issues, the sector is experiencing growth — primarily driven by decentralized platforms as the growth engine.