do you find DeFi a little confusing well you’re
not alone for many the sheer variety of services out there can feel overwhelming but a recent
report offers some much needed clarity shedding light on the mechanics of borrowing and lending
within both CFI and DeFi protocols that’s why today we’re breaking down the key insights from
that report in simple straightforward terms so that you can level up from a borrowing beginner to
a protocol pro my name is Guy and you’re watching the Coin Bureau the report we’ll be summarizing
for you today is titled quote the state of crypto lending bringing transparency to an opaque market
it was published in April 2025 by Galaxy Research and we’ll leave a link to the full report below if
you’re interested as the name suggests the report aims to educate people on the elusive nature
of lending and borrowing services however we should forewarn you here the report is worded in
an incredibly complicated way often making things difficult to understand here’s a single randomly
selected sentence to show you what I mean quote “The combination of flatter and steeper legs
of the interest rate curve in conjunction with optimal utilization rates creates a self-adjusting
mechanism that autonomously manages relative protocol liquidity/ lender income and the capital
efficiency of deposits through incentivedriven forces nope me neither to be honest this isn’t
like any Galaxy report we’ve covered in the past but fear not we’re going to simplify this one
as we go along and give you the highlights all we ask in return is that you punch those like and
subscribe buttons and ping that notification bell while you’re at it okay enough talk let’s
dig in so the report starts by explaining the differences between lending on centralized
finance or CFI and decentralized finance or DeFi both CFI and DeFi can be broken down into three
categories for CFI these are over-the-counter or OTC transactions prime brokerage and onchain
private credit now OTC deals are private loans arranged by a centralized entity usually between
a lender and an accredited investor things like interest rates maturity period and the loan to
value or LTV ratio are agreed upfront for those wondering the LTV ratio refers to the loans amount
relative to the value of the collateralized assets prime brokerages offer crypto and ETF trading
with built-in financing and meanwhile onchain private credit services use the blockchain as a
crowdfunding tool pooling tokenized debt funds together onchain to then be used in off-chain
deals as for DeFi the three categories here are lending applications collateral debt position or
CDP stable coins and decentralized exchanges or dexes as the name suggests lending apps let users
borrow crypto by locking up crypto as collateral with the loans terms set by the app’s risk
models collateral debt position stable coins are overcolateralized with crypto like DeFi loans but
instead of borrowing crypto you mint a synthetic USD pegged token against your collateral and most
of you will already be familiar with dexes such as unis swap radium and pancake swap to name just a
few some dexes allow users to use leverage to take on additional risk and amplify their positions and
by the way if you’re looking to maximize your own the state of the lending market in both CFI and
DeFi which was shaken to its core after a series of black swan events in 2022 events that sent
us deep into the depths of a crypto bare market for perspective the report highlights that
from the 2022 peak to the bare market low CFI and DeFi lending shrank by about 78% with CFI
losing 82% of open borrows big names like Voyager Celsius BlockFi Genesis and Silvergate were major
casualties all of which went under in any case the report reveals that crypto lending only took
off around late 2019 to early 2020 despite some players launching way back in 2012 the real
boost came after Ethereum launched in 2015 bringing smart contracts that made DeFi possible
so what exactly went wrong in 2022 well those of you who’ve been around for a while will still
probably be discussing it all with your therapists for everyone else a few notable events kickstarted
a rocky 18-month period for the lending market and indeed the broader crypto market too these
included the collapse of Terra’s US stable coin and Luna token in May 2022 the deping of
Lido’s staked ETH token less than a week later the liquidation of Three Arrows Capital in July
2022 and of course the spectacular collapse of FTX in November 2022 the world’s second largest
crypto exchange at the time the implosion of FTX and Alama Research then caused the subsequent
collapses of BlockFi in November 2022 Genesis in January 2023 and Celsius in July 2023 thanks
a lot Sam don’t drop the soap will you galaxy estimates that at its peak CFI lending reached
$ 34.8 billion but dropped 82% to $6.4 billion in the bare market by Q4 of 2024 it had recovered
73% to 11.2 billion though it’s still 68% below its all-time high good progress but a long road
ahead in 2022 76% of the $ 34.8 billion CFI market was held by just three lenders Genesis BlockFi and
Celsius today Tether Galaxy and Leen dominate with 89% of market share the chart provided shows that
Tether takes the lion share accounting for over 70% of activity while Galaxy Leen and Coinbase
have roughly equal market share next the report looks at the combined borrowing activity of CFI
and D5 protocols notably DeFi borrowing hit a low of $1.8 billion during the bare market but
surged 959% to $19.1 billion by the end of 2024 impressive stuff the report notes that this is
across 20 lending applications on 12 different blockchains although annoyingly it doesn’t explain
which applications or which blockchains it would have been nice to compare these just saying anywh
who the report explains that by Q4 2024 onchain loans were 18% higher than the 16.2 billion peak
of the previous bull market notably DeFi rebounded much faster than CFI thanks to its permissionless
nature and the fact that most DeFi protocols continued to function and didn’t go bankrupt
unlike their CFI counterparts in Q4 2021 crypto lending hit $ 48.4 billion excluding the market
cap of collateral debt position or CDP stable coins a year later it dropped 80% to $9.6 billion
and by the end of 2024 it had recovered to $30.2 billion marking a $214% growth what’s intriguing
is that despite the collapse of major CFI projects from May 2022 to July 2023 DeFi didn’t lead the
lending market until Q1 2024 by the end of 2024 DeFi lending excluding CDP stable coins was
almost double that of CFI holding 63% of the crypto lending market when you include CDP stable
coins the crypto lending market peaked at 64.4 billion in Q4 2021 by the bare market bottom in Q3
2023 it had dropped 78% to 14.2 2 billion but then rebounded by 157% to $36.5 billion by the end of
2024 the report then highlights a noticeable trend essentially DeFi lending and CDP stable coins have
grown steadily since Q4 2022 however CDP stable coins have actually lost dominance as DeFi lending
terms improved stable coin liquidity increased and things like Deltaneutral stable coins such as
Athena’s USDE have emerged then the report looks at venture investment and crypto lending between
Q1 2022 and Q4 2024 CFI and DeFi lending platforms raised $1.63 63 billion across 89 deals q2 of 2022
marked the peak of funding at $52 million while Q4 of 2023 marked the low at just $2.2 million of all
the venture capital invested in the broader crypto market VC allocations to crypto lending apps made
up only 2.8% of total VC investment from Q1 2022 to Q4 2024 the highest share was 9.75% in late
2022 but by the end of 2024 it had dropped to just 0.62% ouch okay folks very sorry to interrupt but
I quickly want to tell you about the Coin Bureau what went wrong between 2022 and early 2023 and
the long-term impact on lending to refresh your memory major crypto lenders like BlockFi Celsius
Genesis and Voyager went bankrupt during this period what’s crazy is that at their peaks these
four companies made up 40% of the entire crypto lending market and 82% of CFI lending however when
the market shifted from bull to bare their poor risk management and acceptance of toxic collateral
were exposed the report highlights that this was revealed after crypto topped out and asset prices
began to plummet specifically the total market cap of crypto excluding BTC USDT and USDC dropped by
77% losing $1.3 trillion this took the market cap from $1.7 trillion to $399 billion in just 46 days
during which lenders watched in horror as Terra’s $18.7 billion US stable coin and $39 billion Luna
token collapsed this made any collateral tied to these tokens worthless with lenders struggling
to offload these assets as liquidity dried up the market downturn also caused issues for both
Gayscale’s Bitcoin Trust which later became a spot Bitcoin ETF and Lido’s staked ETH token the
problem was that investors couldn’t withdraw the underlying assets BTC for Gayscale and ETH for
Lido for Lido the Ethereum beacon chain hadn’t enabled staked ETH withdrawals while Grayscale’s
trust structure prevented instant BTC withdrawals as a result liquidity for STE and Gayscale’s
GBTC dried up leading to heavy sell pressure on the underlying assets as such GBTC which had
traded at a premium for years began trading at a discount of almost 50% relative to BTC meanwhile
ST deped trading at a 6.25% discount to ETH’s value elsewhere a similar issue happened with
Bitcoin miners who often use AS6 the hardware used to mine Bitcoin as collateral for loans
since ASIC values depend on BTC’s price this collateral quickly lost value additionally mining
rigs are hard to sell which contributed to even greater losses the report then examines the hash
price for Bitcoin miners which measures the daily revenue per unit of mining power before costs
it’s typically expressed in dollars per terahash one trillion hashes per second or dollars per
paash one quadrillion hashes per second these represent the number of guesses an ASIC machine
makes each second to solve a block’s puzzle and earn BTC anyhow the chart provided shows the
evolution of Bitcoin’s hash price and network difficulty over the last 5 years notably when
BTC peaked at around $67,600 the hash price was $43 per paash per second with a network difficulty
of about 21.7 trillion hashes over the following 13 months BTC’s price dropped 75% to $16,600 while
network difficulty rose by 58% leading to an 86% decline in hash price this sharp drop relative
to BTC’s price was mainly due to rising mining difficulty intensifying competition among miners
and reducing the BTC earned per unit of hash power now ultimately this drove down the values of AS6
but what’s crazy is just how much of an impact it actually had between Bitcoin’s previous cycle high
in 2021 and the bare market bottom in December 2022 individual ASIC machines lost between 85%
and 91% of their value to make matters worse newer more efficient AS6 made older rigs less
competitive and less valuable as such the ASIC collateral backing loans taken out by miners
lost over 90% in value okay now the next part of the report looks at the positive developments
in the lending market since the deleveraging in 2022 and 2023 in the aftermath of the bare market
the industry began to self-regulate with tighter risk management and more thorough due diligence
perhaps more importantly though lenders have taken steps to vet their borrowers making sure they’re
solvent and won’t get liquidated this means not offering unsecured or undercolateralized loans
which was a huge problem beforehand according to the report quote Celsius had up to 36.6% of its
institutional loan book occupied by unsecured borrowers and BlockFi lent unsecured to FTX the
report then highlights things to watch in the near future for CFI lending these include banks and
institutions entering the space improving capital access and liquidity while lowering costs and this
shift has been supported by regulatory changes namely the SEC repealing SAP 121 meaning banks
can offer crypto services again including lending bitcoin ETPs have also created opportunities
for lending with ETPs serving as collateral meanwhile the report notes that the future of
onchain credit lies in the tokenization of debt bringing more utility transparency and automation
it also improves risk management lowers costs and could be used as collateral or to mint CDP stable
coins expanding their role in DeFi and speaking of which Galaxy says that the future of DeFi lending
hinges on more institutions and off-chain firms using its tech as they get more comfortable with
the blockchain see the benefits of going onchain and gain clearer regulatory guidance at the same
time more centralized firms are moving their private credit and business operations onchain
moving on and the next part of the report looks at historical trends in onchain and off-chain lending
activity notably lending is DeFi’s top sector led by Ethereum as of the 31st of March 2025 almost
$40 billion was deposited across 12 EVM compatible layer 1 and layer 2 chains although again it
doesn’t say which ones in contrast Salana holds just $3 billion in deposits on Ave Ethereum’s
largest lender the main collateral types are wrapped BTC ETH and ETH liquid staking tokens
or LSTs there’s $13.5 billion in collateral when combined as of the end of March with $ 8.9
billion actively borrowed against it this gives an average loan to value or LTV ratio of 65.9%
total borrows across all 13 chains including the $1.1 billion on Salana hit 15.3 billion by
the 31st of March with a 41.45% utilization rate ave alone accounts for 58% of that at $8.9 billion
moreover open borrows hit an all-time high of $20 billion in January 2022 across the 12 EVM chains
whatever chains those were eth and stable coins are Ave’s most borrowed assets many investors
will deposit crypto as collateral for extra liquidity for additional trades and borrowing ETH
against liquid restake ETH lets users leverage their ETH positions users also utilize the native
staking yield built into LSTs to cover some of the loans costs for additional ETH and next the
report covers weighted borrow rates for Bitcoin notably wrapped BTC has maintained low borrowing
costs since it’s mostly used as collateral meaning there’s far less borrowing demand compared to
plain old BTC however BTC isn’t compatible with smart contract blockchains hence the wrapped
ERC20 versions that can be used on EVM chains as for ETH and ETH LSTs the chart provided shows
that ETH borrowing rates are much higher than the liquidst versions specifically borrowing rates for
ETH LSTs are around 0.5% whereas it’s roughly 2.5% for ETH this difference is caused by variations in
interest rates and how much assets are used across lending platforms generally speaking unstaked
ETH is heavily borrowed while ETH LSTs are used primarily as collateral by using these staked
tokens users can secure ETH loans at a lower sometimes negative borrowing rate many will then
loop this strategy borrowing ETH staking it and repeating to boost their exposure to ETH staking
yields the report then notes that stable coin rates both onchain and off-chain track crypto
market trends and demand for leverage onchain rates are more volatile spiking up to 15% while
OTC rates range between 7% and 10% usdc and USDT have similar OTC rates but onchain their rates
differ due to varied use cases and risk profiles as for BTC rates there’s a clear divergence
between onchain and OTC markets otc demand comes from shorting BTC and using it as loan collateral
for example after FTX collapsed in 2022 OTC rates for BTC spiked from an increase in shorting demand
likewise in February 2024 they rose again as firms borrowed BTC for stablecoin or cash loans at the
start of the bull market off-chain ETH rates are stable driven by ETH staking yield onchain rates
stay close to this level as lenders prefer lending below the staking rate while borrowers lack
incentives to borrow ETH due to limited yield opportunities otc ETH rates follow a similar but
milder pattern to BTC shorting drives demand in bare markets and collateral use rises in bull
markets still firms prefer staking ETH over using it as loan collateral in OTC deals and finally we
have CDP stable coins which had a combined supply of $9.6 billion by the end of March sky USDS
formerly D had the lion share of this with $8.7 billion in supply however the report adds that
despite stable coin supply being near all-time highs CDP stable coins are still 46% below their
peak of 17.6 billion in January 2022 notably CDP stablecoin share of the stable coin market fell
from 10.3% to 4.1% by the 31st of March due to the rise of USDT yieldbearing stable coins like USDE
and weaker demand for CDP stable coins as onchain dollar liquidity their market cap dropped 55% from
$17.3 billion in January 2022 to $7.9 billion by March mirroring the decline in open borrows on
lending apps and that brings us to the end of this report well sort of there’s actually another 12
pages but honestly the back end of the report just explains various aspects of the lending market
in extreme detail including specific code that various protocols use to determine borrowing rates
but hey if that’s your thing then by all means the full report is in the description below go nuts
for now though there’s just one question remaining what does all of this mean for the crypto market
well it’s clear that the lending market is recovering well since SPF blew crypto all the way
to hell there’s still a way to go yet but so far so good this sector will likely benefit as the
bull market continues that’s because investors will want to borrow against the BTC ETH and other
large cryptos they have to invest in other cryptos mostly altcoins in turn this will also help pump
the prices of these altcoins what’s more is that the regulatory backdrop which continues to improve
suggests that the lending sector will be bigger than ever that’s because institutional investors
will have much more confidence in exploring some of crypto’s more nuanced corners including DeFi
the downside if indeed you can call it that is that it appears VCs aren’t remotely interested in
lending given that less than 1% of venture capital finds its way into the lending market again though
this could change with the improved regulatory backdrop from our perspective crypto lending will
grow in a big way as the tokenized realorld asset sector or tokenized RWA gains traction that’s
because institutions are desperate to leverage DeFi to find new ways to generate a yield on
assets that were previously offchain and of course more lending means more demand for crypto so this
is definitely something you should be keeping a very close eye on now if you enjoyed that video
smash those like and subscribe buttons and turn on those notifications too so you don’t miss our
next one if you want to see what catalysts could drive the crypto bull run then check out this
video right over here and if you want to learn more about how institutions are trading OTC then
you can find out by checking out this video right over here thank you all for watching and we’ll
see you in the next one this is Guy signing off
