DeFi revolutionizes crypto lending and leaves centralized finance behind

Cryptocurrency lending in the decentralized finance (DeFi) ecosystem reached $19.100 billion in 2024, nearly doubling the amount of lending on CeFi platforms.

The cryptocurrency lending market is undergoing a significant transformation thanks to the rise of decentralized finance (DeFi) platforms. By the end of 2024, lending DeFi reached $19.100 billion, representing a 959% growth from the bear market low.

This substantial increase, according to Galaxy Digital, indicates a clear preference for DeFi platforms over centralized finance (CeFi) in the crypto lending sector. 

The firm's analysts attribute the expansion of DeFi to its permissionless nature and the appeal of overcollateralized, algorithmic lending driven by supply and demand. This shift in the digital financial landscape underscores the growing maturity of digital asset infrastructure and the pivotal role DeFi lending plays in the crypto economy.

The explosive growth of DeFi lending

DeFi lending has seen spectacular growth since the bear market of 2022, increasing by 959% to reach $19.100 billion in Q2024 20. This growth, according to Galaxy Digital, has occurred across 12 lending applications spread across XNUMX different blockchains, highlighting protocols such as Aave and Compound, which have survived and thrived despite market volatility. 

The decentralized nature of these platforms, which do not require strict permissions or know-your-customer (KYC) processes, has facilitated their adoption, especially in regions where regulations limit the offering of CeFi products.

Furthermore, technological innovation, such as the integration of artificial intelligence agents to automate operations and improve efficiency, has contributed to the sector's expansion. This boom has also been fueled by a macroeconomic environment that has incentivized the use and demand for cryptocurrencies.

CeFi in crisis, DeFi booming: Consolidation after the bear cycle

In the report The State of Crypto Lending From Galaxy Digital, which discusses the state of cryptocurrency lending on and off the blockchain, the firm highlights that the CeFi sector is still struggling to regain its size and confidence following the crisis seen in 2022. 

According to the report, the digital asset lending market on CeFi is valued at $11.200 billion, up 73% from its lows but still 68% below the $34.800 billion peak seen in 2021. The drop in activity on centralized platforms is primarily attributed to the collapse of projects like Celsius and BlockFi, which led to a massive loss of confidence among investors and users.

However, the report also highlights that the Total crypto lending market in DeFi, that is, on decentralized platforms, is booming. According to the report, this market closed in 2024 at $36.500 billion dollars, including loans backed by stablecoins and crypto assets. While last year's figures represent a decrease of almost half from the peak of $64.400 billion recorded in 2021, they also show that the sector is regaining interest and gaining market share. 

How DeFi Lending Works

Loans in the DeFi ecosystem operate under a surplus collateral model, where users must offer assets as collateral to access a loan. These assets are locked on the platform for the duration of the loan, in order to optimize the use of the deposited capital.

The choice of asset used as collateral has a direct impact on interest rates and borrowing limits. Thanks to their decentralized nature, DeFi platforms allow users to lend and borrow directly from each other, eliminating the need for traditional financial intermediaries such as banks. 

In essence, this structure not only facilitates access to credit, but also allows users to generate income through interest on their assets that would otherwise remain idle.

Factors driving sector growth

Several factors are contributing to the rise of DeFi in the cryptocurrency lending market. First, transparency and security Blockchain transactions attract users looking for alternatives to traditional financial systems.

Second, the flexibility and speed of DeFi loans, such as flash loans, allow users to access capital without collateral, facilitating trading and arbitrage. Third, DeFi platforms offer better conditions of interest compared to traditional financial institutions, incentivizing users to participate in this ecosystem.

“DeFi lending has seen a stronger recovery than CeFi lending. This can be attributed to the permissionless nature of blockchain-based applications and the survival of lending apps during the bear market chaos that affected major CeFi lenders.”, Galaxy Digital stressed. 

The DeFi Revolution

In short, the crypto lending market is undergoing a significant structural shift, with DeFi consolidating as the primary driver of growth and recovery following the bear market seen in 2022.

The ability of decentralized platforms to offer services without intermediaries, coupled with technological innovation, has allowed DeFi lending to nearly double the volume of CeFi lending by 2024, evidencing a profound transformation in the crypto ecosystem, where decentralization and regulation will play a crucial role in defining the future of digital financial services.

Investing in cryptoassets is not fully regulated, may not be suitable for retail investors due to high volatility and there is a risk of losing all invested amounts.