Cryptocurrencies deposited to decentralised finance protocols has soared to its highest level in more than two years amid a broad crypto bull market.
Among them, one set of DeFi tools has outshone the rest: lending protocols.
These protocols let users deposit crypto as collateral and take out loans automatically, as long as the value of the borrowed assets is less than their collateral.
One reason lending protocols are booming, according to Paul Frambot, the founder of lending protocol Morpho, is the demand for leveraged bets.
“Market price action has driven a surge in borrowing demand as people want to increase their price exposure,” he told DL News. “They do this onchain by borrowing from protocols like Morpho to buy more of the assets they expect to rise in value.”
That strategy is called looping. Here, users deposit an asset they’re bullish on — they think the price will go up — as collateral to borrow stablecoins. The user then sells those stablecoins to buy more of their collateral asset, increasing their exposure to it.
Since the start of the month, Morpho’s total value locked, including tokens borrowed from the protocol, soared 56% to an all-time high of $3.8 billion.
Total value locked — or TVL — is a measure of the value of assets a given DeFi protocol custodies for users.
‘Yield-hungry lenders’
But Morpho isn’t alone.
Deposits jumped 42% in the same period on DeFi lending giant Aave, which has over $32 billion in TVL. Sky-affiliated Spark, a lending protocol with $5.6 billion in TVL, grew 62%.
Smaller protocols offering more niche lending options, such as Euler, have seen even bigger increases. Its deposits have jumped 576% since the start of the month.
“A major factor has been a more positive outlook for the broader crypto market, driven by growing institutional adoption and a more favourable regulatory environment on the horizon,” Michael Bentley, founder of Euler, told DL News.
Bentley explains that the rising tide has led to increased borrowing, as market participants speculate on rising prices. This, in turn, leads to rising interest rates, which draws in yield-hungry lenders.
The increased demand means the yield lenders can earn depositing assets is now consistently the highest it has been in years.
In March last year, an attacker exploited a bug in Euler’s code to steal almost $200 million of users’ assets.
Although the funds were later returned, the protocol was unable to recover, and lay dormant until it relaunched in August.
In-demand assets
The most in-demand asset on top lending protocol Aave is Ether, with almost $5 billion worth borrowed.
But that’s not the case for Euler and Morpho, which allow users to borrow against a broader range of assets.
Derivative yield tokens issued by DeFi protocol Pendle account for $450 million of borrowings on Morpho. On Euler, tokenised versions of US Treasury bills issued by real-world asset protocol Midas are increasing in popularity.
“Rapid growth in the creation of restaking and real-world assets, many of which offer yield, are leading to the creation of new lending and borrowing opportunities,” Bentley said.
Even other DeFi protocols are getting in on the action.
According to Frambot, Sky, formerly MakerDAO, recently deployed $650 million of its DAI stablecoin on Morpho to earn yield.
But the surging appetite for borrowing also means there’s a potentially dangerous build-up of leverage that could increase price volatility.
If the assets a borrower puts up as collateral decreases in value they risk being sold off to stop the protocol accruing bad debt, a process known as liquidation.
On Aave, over $20 million of Lido staked ETH tokens are at risk of being liquidated if Ethereum’s price drops below $3,292, according to DefiLlama data.
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.
