Active on-chain lending is back to levels not seen since the peak of euphoria in 2021. A proxy measure of DeFi activity shows that borrowers have confidence in the bull market to this point, and are looking to make gains through collateral-based lending.
DeFi lending is set to become one of the leading applications in 2024. While the total DeFi value locked is still lower than it was in 2021, on-chain lending is just as active as it was during the previous bull cycle.
On-chain leverage is a more mature market, with leading protocols spreading to multiple chains. Additionally, current on-chain leverage is only comparable to 2021 in nominal terms.
This metric was reached at a time when Bitcoin (BTC) was at a crossroads, once again raising questions about the peak of its cycle. In 2021, the peak of lending coincided with price euphoria, but ended up spreading the contagion to multiple protocols. Since then, DeFi lending growth has become more conservative, taking into account the value of collateral.
Additionally, some protocols have turned to treasury bonds as collateral, removing a layer of risk associated with cryptocurrency prices.
Lending gets a boost from a larger pool of stablecoins
As a percentage of the money supply available in the cryptocurrency market, this cycle still uses a smaller percentage of the available stablecoins. This has led to expectations of broader lending, which in turn could boost exchange-traded swaps and other activities.
With the supply of stablecoins rising, DeFi lending also limits contagion in the event of a market downturn.
Leverage is increasing, but as a percentage of money supply, DeFi active DeFi loans are only 50% of the level reached in the last cycle.pic.twitter.com/2kysPxjyQg
— Jamie Coutts CMT (@Jamie1Coutts) December 17, 2024
During the 2024 cycle, DeFi and centralized trading will offer nearly $200 billion in various stablecoins. The DeFi space also has algorithmic or asset-backed coins and tokens that can create specialized sources of liquidity, such as USDe, USDS, the remaining supply of DAI, and other smaller stablecoins.
On-chain loans have surpassed $22.85 billion, with lending protocols being replaced by new centers as of 2021. The DeFi lending market has recovered from the collapse that followed the Terra (LUNA) decoupling, as well as the subsequent collapse of FTX.
Leverage works across the chain as long as the underlying collateral is stable and exceeds the loan. The loans are then often used in other DeFi protocols. The loans are typically in the form of stablecoins, which can then be used to purchase assets or stored in high-yield vaults.
Aave still relies mostly on WETH and WBTC, while also incorporating smaller tokens into its lending vaults. Even other lending protocols have moved their activity to Aave, in an effort to boost liquidity and offer a simpler approach for users.
Recently, AAVE has also been on the receiving end of whale buying. On-chain lending is sometimes credited to DeFi, as in the case of recently reported whale activity. Whales borrowed GHO as an on-chain loan and used the proceeds to buy more AAVE. These practices can boost the token’s price. However, they can also expose the loans to liquidation.