The structure, risks, and new cycle of the on-chain lending market

Author: CoinW Research Institute

Key Points

On-chain lending functions are gradually transforming from early tools primarily focused on leverage to infrastructure for capital allocation. On-chain lending has become an important part of the DeFi ecosystem. Currently, the total value locked (TVL) in on-chain lending protocols is approximately $64.3 billion, accounting for about 53.54% of the total DeFi TVL.

Aave has become the leading protocol in the on-chain lending sector, with a TVL of about $32.9 billion, representing roughly 50% of the total lending sector TVL. Meanwhile, protocols like Morpho continue to consolidate their market share, resulting in a structure where one dominant player is followed by many strong competitors.

Credit assets have become a significant component of on-chain RWA (Real World Assets). As more types of debt and other assets are introduced on-chain, and as institutional demand for compliant and traceable collateral increases, RWA lending is expected to become another major growth engine. Additionally, macroeconomic monetary policy improvements and regulatory framework enhancements are jointly reducing capital flow and compliance costs, creating more favorable external conditions for market development.

On-chain lending protocols also face multiple risks. First, they are highly dependent on collateral value and market liquidity, with market fluctuations easily triggering liquidations. Second, the introduction of unsecured lending and RWA increases credit default and counterparty risks. At the same time, over-reliance on token incentives can artificially inflate scale, and cross-chain bridging security issues expose high risks. Therefore, on-chain lending protocols must balance growth with safety, liquidity, and compliance.

As compliant assets such as tokenized securities and US Treasuries gradually enter the on-chain space, on-chain lending is evolving from a native crypto financing tool to a mainstream financial infrastructure, with more robust collateral foundations. During this process, institutional on-chain lending is expected to become an important incremental driver. Meanwhile, the coexistence of fixed and floating interest rates will promote the maturity of the on-chain interest rate system. Regulatory and capital considerations may also lead to a market segmentation into compliant, stable segments and high-risk, innovative segments. On-chain lending will accelerate integration into the global capital markets through asset compliance and institutional linkages.

Table of Contents

1. Overview of the On-Chain Lending Market

   • 1.1. Market Size and Capital Flows
   • 1.2. Macro and Industry Drivers
   • 1.3. Regulatory Trends and Compliance

2. Classification of On-Chain Lending Markets

   • 2.1. Collateralized Lending Protocols
   • 2.2. Unsecured Lending Protocols
   • 2.3. Modular Lending Protocols
   • 2.4. RWA and Lending Integration

3. Competitive Landscape

   • 3.1. Leading Protocols and TVL Changes
   • 3.2. Revenue Structures and Profit Models
   • 3.3. User Profiles and Asset Structures
   • 3.4. Multi-Chain Deployment and Ecosystem Integration

4. Risks and Challenges

   • 4.1. Liquidity Risks
   • 4.2. Credit Default Risks
   • 4.3. Incentive and Growth Illusions
   • 4.4. Cross-Chain Risks

5. Potential Development Trends

   • 5.1. Institutional On-Chain Lending
   • 5.2. Tokenization of Securities and Collateralization Potential
   • 5.3. US Treasuries as Core Lending Assets
   • 5.4. Coexistence of Fixed and Floating Rates
   • 5.5. Dual-layer Market Segmentation

6. Conclusion

References

On-chain lending protocols have become a vital part of the DeFi ecosystem. From initial leverage expansion tools, they have now expanded to include diversified capital markets such as stablecoins and RWAs. These protocols not only reliably support liquidity but are increasingly becoming key price discovery centers and capital allocation hubs. Currently, the total TVL in on-chain lending protocols is about $64.3 billion, roughly 53.54% of DeFi’s total TVL (approximately $120.2 billion). Specifically, Aave dominates with about 50% of the lending TVL, approximately $32.9 billion; protocols like Morpho hold certain market shares.

Furthermore, the sources of funds and asset categories in on-chain lending are diversifying, with RWAs becoming a new growth engine. The structure of the on-chain lending market faces both growth opportunities and challenges. On one hand, TVL in lending protocols has gradually rebounded, indicating a market recovery. On the other hand, structural issues remain, such as severe liquidity fragmentation, dispersed funds across protocols and chains, and a lack of efficient liquidity aggregation mechanisms. Traditional stablecoin lending is reaching saturation, while RWA and institutional credit still face supply shortages, leading to interest rate divergence and risk appetite differences. This report will systematically analyze the operation logic, current development, and trends of the on-chain lending sector from the perspectives of market overview, classification, and competitive landscape.

For the full report, please see: https://www.coinw.com/zh_CN/research/on-chain-lending-market-structure-risks-and-the-new-cycle/106