Understanding DeFi vs CeFi Lending: Key Trends in Crypto

Did you know that the lending market in crypto shrank by about 78% in 2022? It’s a stark reminder of how volatile the landscape can be in both DeFi and CeFi.
Yet by the end of 2024, on-chain borrowing had rebounded by nearly 960%, signaling that recovery and innovation go hand in hand.

The Landscape of Crypto Lending: CeFi and DeFi Explained

The crypto lending market broadly divides into centralized finance (CeFi) and decentralized finance (DeFi). In CeFi, over-the-counter (OTC) transactions involve private loans negotiated between accredited investors and institutions, with interest rates, maturities, and loan-to-value (LTV) ratios set upfront. Prime brokerages bundle trading and financing services for institutional clients, often providing margin accounts for crypto and ETFs. Onchain private credit harnesses blockchain crowdfunding to pool tokenized debt, which is then deployed into off-chain loans.

In contrast, DeFi lending applications like Aave and Compound let users lock assets as collateral and borrow according to algorithmic risk models. Collateral Debt Position (CDP) stablecoins—popularized by MakerDAO—allow minting of a synthetic USD‐pegged token against over-collateralized crypto rather than borrowing crypto directly. Decentralized exchanges (DEXs) such as Uniswap, PancakeSwap, and Curve facilitate spot trading and, in many cases, offer leveraged positions through integrated lending pools. Each segment serves different participants but shares a common goal: expanding access to credit in the crypto market.

How 2022 Black Swan Events Shook the Market

In 2022, a cascade of black swan events pushed both CeFi and DeFi lending to their knees. From the collapse of Terra’s UST and LUNA in May 2022 to the liquidation of Three Arrows Capital in July, the lending market suffered massive asset write-downs. The collapse of FTX in November 2022 triggered further insolvencies, taking down high-profile platforms like Voyager, Celsius, and BlockFi. According to Galaxy Research, total open borrowings across CeFi and DeFi plummeted by approximately 78%, with CeFi alone losing 82% of its peak from $34.8 billion to $6.4 billion. Such steep declines revealed systemic weaknesses in risk management and collateral quality across the crypto lending sector.

“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 incentive-driven forces.” [verify]

The Surprising Rebound of CeFi and DeFi Markets

Despite the turmoil, both CeFi and DeFi markets demonstrated resilience. By Q4 2024, CeFi lending had recovered 73% to $11.2 billion, driven in part by stronger collateral practices and renewed confidence in regulated players. DeFi lending posted an even more dramatic recovery: after hitting a low of $1.8 billion in mid-2023, borrowing on DeFi protocols surged 959% to $19.1 billion by the end of 2024 across 20 major applications on 12 blockchains. Permissionless architectures allowed smart contracts to continue functioning without the operational disruptions that hit CeFi firms. Today, DeFi borrowing exceeds CeFi activity, accounting for roughly 63% of the combined crypto lending market when excluding CDP stablecoins.

Notable Trends Shaping Crypto Lending

Several key trends have emerged in the post-crisis lending landscape:

• Resilience and Self-Regulation: Lenders now enforce stricter collateral requirements, thorough due diligence, and real-time monitoring of health factors to prevent undercollateralized debt.
• Institutional Collaboration: Traditional banks and asset managers are entering crypto lending, spurred by regulatory clarity such as the SEC’s repeal of SAP 121 and the rise of spot Bitcoin ETFs. These institutions bring deep liquidity and familiar credit frameworks.
• Tokenization of Debt: On-chain debt instruments improve transparency and offer programmable repayment schedules, enabling more efficient risk allocation and secondary trading of loan positions.

These developments not only fortify existing markets but also lay the groundwork for new financial products in both DeFi and CeFi.

Understanding Current Borrowing Costs and Rates

Borrowing rates in the crypto market vary widely by asset and venue. On-chain lending rates for stablecoins like USDC or USDT can spike up to 15% during periods of high demand, while OTC rates generally range between 7% and 10%. Wrapped BTC (WBTC) often carries lower rates—sometimes below 1%—because it is overwhelmingly used as collateral rather than borrowed, reflecting limited demand to short BTC on smart contract platforms.

Meanwhile, ETH borrowing rates tend to hover around 2.5% on average, whereas liquid staking tokens (LSTs) such as stETH command rates closer to 0.5%, thanks to their built-in staking yields. Traders frequently “loop” staked ETH—borrowing ETH against stETH collateral, staking the proceeds, and repeating—to amplify yield exposure. Understanding these rate differentials can help borrowers optimize leverage strategies and lenders adjust risk premiums.

Looking Ahead: Future of Crypto Lending

As regulatory frameworks become clearer and traditional institutions grow more comfortable with on-chain credit, the lending sector looks poised for further expansion. Tokenized real-world assets (RWAs) such as tokenized bonds, real estate, or invoice financing will likely integrate into DeFi lending pools, unlocking trillions in previously illiquid assets. Interoperability between blockchains, cross-margining solutions, and layer-2 scalability enhancements will reduce costs and increase capital efficiency.

Moreover, hybrid models that blend CeFi oversight with DeFi’s automation—sometimes called “CeDeFi”—may offer the best of both worlds by safeguarding against counterparty risk while preserving decentralized accessibility. As these innovations unfold, the boundary between traditional finance and crypto finance will continue to blur, creating new opportunities and driving sustained growth in the crypto lending market.

Conclusion

In summary, the crypto lending market has weathered seismic shocks and emerged more robust than ever. Stronger risk protocols, institutional participation, and advanced tokenization techniques are converging to support the next chapter of growth in both CeFi and DeFi lending.

• Actionable Takeaway: Review your collateral strategy and consider integrating tokenized debt instruments or liquid staking tokens to optimize borrowing costs and diversify credit exposure in the evolving crypto lending ecosystem.

How will you adapt your borrowing or lending strategy to the new dynamics of the crypto lending market?