Crypto-Collateralized Lending Drops 4.9% as Leverage Shifts

Leverage across the crypto economy is undergoing a transformation rather than disappearing. According to Galaxy Research’s Q1 2025 report, total crypto-collateralized lending decreased by 4.9% quarter-over-quarter to $39.07 billion, marking the first decline since late 2023. However, the underlying dynamics suggest that leverage is shifting in form rather than fading away.

In the decentralized finance (DeFi) sector, lending experienced a significant drop early in the quarter, falling as much as 21%. However, this trend reversed sharply in April and May, driven largely by Aave’s integration of Pendle tokens. These tokens feature a yield-bearing structure and high loan-to-value ratios, which sparked a wave of fresh borrowing. By late May, DeFi borrowing had surged more than 30% from its lows, with Ethereum leading the recovery.

In contrast, centralized finance (CeFi) lending saw an increase of 9.24% to $13.51 billion, led by firms such as Tether, Ledn, and Two Prime. However, the report notes that the true scope of centralized lending is likely much higher due to limited public disclosures. Private desks, over-the-counter (OTC) platforms, and offshore credit providers are likely pushing the actual total far higher, perhaps by 50% or more.

Meanwhile, bitcoin treasury companies are quietly becoming a new systemic leverage node. Firms have issued billions in convertible debt to fund bitcoin purchases. As of May, total outstanding debt across these treasury firms stood at $12.7 billion, with much of it set to mature between 2027 and 2028.

In the derivatives market, the rising open interest in ether futures on the CME signals accelerating institutional participation. Concurrently, the upstart exchange Hyperliquid has carved out a growing share of the perpetual futures market, underscoring the continued strength of retail-driven leverage.

The report highlights an increasingly interconnected market structure, where stress in a single venue or instrument could quickly reverberate across the ecosystem. Leverage in the current crypto cycle may be more fragmented than before, but it remains potent. The evolving landscape of leverage in the crypto economy suggests a shift in how financial instruments are utilized, with both DeFi and CeFi sectors adapting to new dynamics and opportunities.