Galaxy: A Comprehensive Overview of the Crypto Lending Market

Introduction

Lending is a foundational use case for cryptocurrencies, finding strong product-market fit both on-chain and off-chain. At its peak, the total market size of this sector exceeded $64 billion. The lending market has also played a crucial role in building a financial ecosystem based on digital assets, enabling users to unlock liquidity from their holdings for deployment in DeFi, trading, and other activities.

This report explores the on-chain and off-chain crypto lending markets, divided into two parts:

1. Market Overview: History, key players, historical size (on-chain and off-chain), and pivotal moments in the industry.
2. Mechanics and Risks: How lending products and leverage sources operate on-chain and off-chain, their users, and associated risks.

This report provides a rare glimpse into the opaque off-chain lending market while offering a comprehensive analysis of one of the most widely used yet understudied segments of the crypto economy.

Key Takeaways

• The total crypto lending market remains 43% below its 2021 peak ($36.5B vs. $64.4B), driven by reduced participation from lenders and borrowers.
• The top three CeFi lenders—Tether, Galaxy, and Ledn—dominate 88.6% of the CeFi market and 27% of the total crypto lending market (including CDP stablecoins).
• On-chain lending has surged 959% since the 2022 bear market bottom ($1.8B → $19.1B in open loans).
• DeFi lending now accounts for 63% of the crypto lending market (excluding CDP stablecoins), up from 34% during the 2020–2021 bull cycle.

History and Current State of Crypto Lending

Crypto lending services are primarily offered through two channels: DeFi and CeFi, each with distinct characteristics:

1. Centralized Finance (CeFi)

CeFi lending includes:

• OTC Lending: Customized bilateral agreements for institutional investors.
• Prime Brokerage: Integrated platforms offering margin financing and custody (e.g., Cantor Fitzgerald, Hidden Road).
• On-Chain Private Credit: Tokenized debt deployed off-chain (e.g., Sky’s DAI/USDS).

2. Decentralized Finance (DeFi)

DeFi lending includes:

• Lending Apps: Overcollateralized loans (e.g., Aave, Compound).
• CDP Stablecoins: Algorithmic stablecoins backed by crypto collateral (e.g., MakerDAO’s DAI).
• Perpetual DEXs: Leveraged trading platforms (e.g., dYdX).

Market Size and Trends

CeFi Lending

• Peak: $34.8B (2022 Q1) → Low: $6.4B (2023 Q3) → Recovery: $11.2B (2024 Q4).
• Concentration: Top 3 lenders now hold 89% market share (vs. 76% in 2022).

DeFi Lending

• Open loans grew from $1.8B (2022 Q4) to $19.1B (2024 Q4).
• Dominance: DeFi lending now represents 69% of the total market when including CDP stablecoins.

Risks and Failures in Crypto Lending

The 2022–2023 collapse of major lenders (Celsius, BlockFi, Genesis) was driven by:

1. Collateral Devaluation: Toxic assets like stETH, GBTC, and Bitcoin ASICs lost 77–90% of their value.

2. Poor Risk Management:

   • Mismatched liquidity (short-term borrowing vs. long-term lending).
   • Undercollateralized loans (e.g., Celsius’s 36.6% unsecured institutional loans).
   • Weak internal controls (e.g., lack of risk limits).

Future Outlook

CeFi Lending

• Traditional institutions (e.g., banks, Cantor Fitzgerald) entering the space will lower funding costs and increase competition.
• Regulatory tailwinds (e.g., SEC’s SAB-121 repeal) may enable banks to offer crypto custody and lending.

DeFi Lending

• Growth in institutional adoption due to:

  1. Familiarity with blockchain risks.
  2. Regulatory clarity.
  3. Expansion of lending app stacks (e.g., Ondo Finance’s Flux).

CDP Stablecoins

• Tokenization and programmable utility will enhance yield opportunities.
• Private credit tokens may become collateral for DeFi protocols.

Data-Driven Insights

Activity

• Ethereum dominates DeFi lending with $30B in deposits (81% of total).
• Top collateral: Wrapped BTC ($13.5B), ETH, and liquid staking tokens (e.g., stETH).

Rates

• Stablecoin APR: ~5.67% (30-day avg).
• ETH/stETH borrowing costs often net negative due to staking yield arbitrage.

CDP Stablecoins

• Total supply: $9.6B (down 46% from 2022 peak).
• Sky’s DAI/USDS is the largest ($8.7B).

How Crypto Lending Works

CeFi Workflows

• OTC: Custom agreements, bilateral negotiations.
• Prime Brokerage: Margin trading for ETFs/spot crypto.
• Private Credit: Tokenized off-chain debt.

DeFi Mechanics

1. Deposit Collateral: LTV, liquidation thresholds, and penalties vary by asset.
2. Borrow Assets: Rates are algorithmically determined based on utilization.
3. Repay/Liquidate: Health factors trigger liquidation if collateral value drops.

Alternatives to Lending Apps

• CDP Stablecoins: Mint synthetic assets (e.g., DAI) against collateral.
• Perp DEXs: Leveraged trading with LP-provided liquidity.

Risks in DeFi Lending

1. Technical Risks:

   • Smart contract exploits (e.g., Euler Finance’s $197M hack).
   • Oracle manipulation (e.g., Morpho’s pricing error).

2. Protocol Risks:

   • Poorly calibrated parameters (e.g., overly strict LTVs).
   • Overcomplexity (e.g., Platypus Finance exploit).
   • Centralized governance (e.g., sudden parameter changes).

Conclusion

Crypto lending has emerged as a cornerstone of digital asset infrastructure, blending traditional finance mechanisms with blockchain innovation. While the market remains below its 2021 peak, DeFi’s dominance signals a shift toward transparent, algorithmic lending.

Key trends for the future include:

• Institutional adoption in CeFi and DeFi.
• Enhanced risk management and regulatory clarity.
• Growth in tokenized private credit and CDP stablecoins.

As the industry matures, crypto lending will likely bridge traditional and decentralized finance, unlocking new opportunities for liquidity and yield.

👉 Explore more about crypto lending trends

FAQ

Q: What caused the 2022 crypto lending crash?
A: Collateral devaluation (e.g., stETH, GBTC), poor risk management, and undercollateralized loans led to major lender bankruptcies.

Q: How does DeFi lending differ from CeFi?
A: DeFi is permissionless, algorithmic, and transparent, while CeFi relies on centralized intermediaries and customized terms.

Q: What are CDP stablecoins?
A: Algorithmic stablecoins backed by crypto collateral (e.g., DAI), minted via overcollateralized loans.

Q: Which assets are most used as collateral in DeFi?
A: Wrapped BTC, ETH, and liquid staking tokens (e.g., stETH).

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