Crypto Lending Market Sees Shift Towards Decentralized Applications
The crypto lending market has experienced a significant shift in recent times, with decentralized applications (DeFi) posting nearly double the amount in outstanding loans compared to centralized finance (CeFi) lenders at the end of 2024. Despite Tether leading the CeFi market along with two other companies, DeFi lending applications have seen a substantial increase in open borrows, reaching $19.1 billion in the fourth quarter of 2024.
CeFi Lending Market Size
According to a recent Galaxy report, the crypto lending market stood at approximately $30 billion on December 31, excluding collateralized debt position (CDP) stablecoins. This figure provides a clearer view of the CeFi lending market, as some overlap may exist between the total size of CeFi loan books and the supply of CDP stablecoins. The report notes that specific CeFi lenders use crypto collateral to mint CDP stablecoins, which are then lent to off-chain borrowers, creating the potential for double-counting.
Adding CDP stablecoins enlarges the market size to $36.5 billion. Tether, Galaxy, and Ledn comprised 88.6% of the CeFi lending sector, with a combined loan book of $9.9 billion. This group represented 27% of the total crypto lending market, including CDP stablecoins.
Market Contraction
The $36.5 billion market size is down 43% from its peak of $64.4 billion in the last quarter of 2021. The market contraction is attributed to the collapse of multiple lenders and a broader decline in borrower demand.
CeFi for Institutions
CeFi lending consists of three major categories: over-the-counter (OTC) lending, prime brokerage services, and on-chain private credit. These offerings target institutional borrowers with customized terms and collateral structures, often executed off-chain or via hybrid mechanisms.
- OTC Loans: OTC loans remain common among accredited investors due to their bilateral customization capabilities, including adjustable loan-to-value ratios and maturity terms.
- Prime Brokers: Prime brokers offer margin financing tied to a narrower set of digital assets and exchange-traded products.
- On-chain Private Credit: On-chain private credit allows users to deploy capital using off-chain credit agreements via on-chain liquidity aggregation.
Although centralized services offer tailored credit products, their reach has narrowed considerably due to heightened counterparty risk and decreased retail trust following high-profile insolvencies between 2022 and 2023.
DeFi Lending Up 959% Since 2022
Open borrows across DeFi protocols reached $19.1 billion in the fourth quarter, spread over 20 lending applications and 12 blockchain networks. This represents a 959% increase from the last quarter of 2022, when the DeFi market reached a low of $1.8 billion in open borrows.
The report attributes the surge to the resilience of permissionless platforms, cross-chain capital mobility, and the emergence of specialized lending applications. Unlike CeFi, DeFi lending enables users to engage directly with smart contracts to borrow and lend assets without intermediaries.
DeFi Lending Benefits
- Real-time Transparency: Protocols such as Aave, Compound, and newer cross-chain services offer real-time transparency, flexible rates, and automated liquidation mechanisms.
- Modular Design: DeFi’s modular design allows protocols to adapt to user demand, asset risk, and evolving liquidity conditions.
- Trust-Minimized Infrastructure: DeFi platforms provide trust-minimized infrastructure, reflecting a user preference for decentralized and secure lending solutions.
Conclusion
The crypto lending market has seen a significant shift towards decentralized applications, with DeFi posting nearly double the amount in outstanding loans compared to CeFi lenders. As the market continues to evolve, it will be interesting to see how CeFi and DeFi lending platforms adapt to changing user demand and market conditions.
FAQs
Q: What is the current size of the CeFi lending market?
A: The CeFi lending market stands at approximately $30 billion, excluding CDP stablecoins. Adding CDP stablecoins enlarges the market size to $36.5 billion.
Q: Who are the leading CeFi lenders?
A: Tether, Galaxy, and Ledn comprise 88.6% of the CeFi lending sector, with a combined loan book of $9.9 billion.
Q: What is the difference between CeFi and DeFi lending?
A: CeFi lending involves centralized intermediaries, whereas DeFi lending enables users to engage directly with smart contracts to borrow and lend assets without intermediaries.
Q: What is driving the growth of DeFi lending?
A: The resilience of permissionless platforms, cross-chain capital mobility, and the emergence of specialized lending applications are driving the growth of DeFi lending.
Q: What are the benefits of DeFi lending?
A: DeFi lending offers real-time transparency, flexible rates, and automated liquidation mechanisms, as well as trust-minimized infrastructure and modular design.
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