I. The background of the surge in active loans for on-chain lending
Recently, active loans in on-chain lending have soared to over 20 billion USD, breaking the record set in December 2021. This significant increase reflects specific dynamic changes in the cryptocurrency market.
II. The impact on liquidity
1. Fund injection and liquidity enhancement
· From a macro perspective, the increase in active loans for on-chain lending equates to a significant injection of funds into the cryptocurrency market. Taking the events related to Bitcoin in 2024 as a reference, when the spot BTC ETF was approved for listing, the influx of funds brought a significant increase in market activity. Similarly, the current growth in on-chain lending funds has increased the available funds in the market, enhancing market liquidity.
· The importance of liquidity in the cryptocurrency market is self-evident. For example, when investors want to sell a certain amount of cryptocurrency, higher liquidity ensures that transactions can be completed more quickly and with relatively less impact on prices. This is similar to traditional financial markets, where an increase in liquidity benefits the rational pricing of assets.
2. The correlation with other market factors
· However, this increase in liquidity does not exist in isolation. Just as the cryptocurrency market in 2024 is influenced by various macro factors, the global macroeconomic situation and monetary policies (such as the Federal Reserve's interest rate decisions) are also intertwined with the liquidity brought by on-chain lending. For example, if a slowdown in global economic growth leads to a decrease in investors' risk appetite, despite the increased funding provided by on-chain lending, it may flow more towards relatively conservative investment directions, with limited impact on the higher-risk cryptocurrency segment.
III. The impact on cryptocurrency prices
1. The potential logic driven by prices
· Under normal circumstances, an increase in liquidity may drive up cryptocurrency prices. Looking back at the fluctuations in Bitcoin prices in 2024, the inflow of funds was accompanied by price increases, stimulated by some positive factors (such as ETF approvals, etc.). The same applies to other cryptocurrencies, where more funds seek investment opportunities in the market; when demand increases while supply remains relatively stable, there is upward momentum for prices.
· From the perspective of supply and demand, the increase in active loans for on-chain lending may attract more investors into the market, increasing the demand for cryptocurrencies. For instance, some investors who were originally in a wait-and-see mode may follow the trend and enter the market upon seeing active funds, thereby driving prices up.
2. Risk factors for price adjustments
· However, the current situation also poses risks that could lead to market adjustments. On one hand, the substantial growth in the scale of on-chain lending may indicate an overheating market. Just like in certain periods of 2024, the rapid rise in Bitcoin prices was accompanied by increased volatility. If most investors enter the market based on short-term speculative purposes, once market sentiment shifts, it may result in a massive withdrawal of funds, triggering a price drop.
IV. The impact on DeFi
1. Positive promoting effect
· The surge in active loans for on-chain lending has a positive promoting effect on DeFi. DeFi relies on decentralized lending and other financial services; more lending activity means more users participating in the DeFi ecosystem. For example, in some Ethereum-based DeFi projects, the growth of lending services will attract more users to utilize other financial services offered on their platforms, such as decentralized exchanges and stablecoin issuance.
· This growth also helps enhance the visibility and market competitiveness of DeFi projects. Among numerous DeFi projects, those that can attract more lending funds often find themselves in a more advantageous position in the market, attracting more developers and investors to further refine and expand the projects.
2. Potential risks and challenges
· However, DeFi also faces some risks. Firstly, as the scale of on-chain lending expands, the security risks of smart contracts become more pronounced. Historically, vulnerabilities in smart contracts could lead to fund losses, and if such incidents occur, they would severely damage the reputation and user trust in the relevant DeFi projects.
· Secondly, market competition has intensified. Although the current increase in active loans for on-chain lending has a promoting effect on DeFi as a whole, if certain projects cannot adapt to market changes and lag behind competitors in risk management, interest rate pricing, etc., they may face the risk of being eliminated from the market.