Fintech may well be hitting its stride, particularly for those with rich cryptocurrency holdings. As it stands, interest rates for collateralized loans on decentralized finance (DeFi) protocols like the market leader Aave V4s (AAVE) are lower than today’s 30-year fixed mortgage rates and most auto loans.
The only positive for traditional finance is that most people don’t own cryptocurrencies or know how to get a loan through a DeFi company. Distinguishing this segment of the blockchain market, DeFi lending applications held approximately 59% of the cryptocurrency-backed lending market in the second quarter of 2025, up from 54% in the first quarter. Most of this comes down to crypto lending on centralized financial exchanges, as opposed to Main Street banking.
This year, DeFi has overtaken centrally funded loans (CeFi) offered on the blockchain. CeFi imploded.
When the new CeFi giants like Celsius And BlockFi failed in 2022, users fled to decentralized players.
“DeFi won because everything is run by open, audited smart contracts, not secret CEOs,” said Jean Rausisfounder of the DeFi protocol and automated market maker, SMARDEX. “This shift was massive, as total on-chain lending soared to $26.5 billion – a quarterly increase of 42% – and it completely eclipsed CeFi’s business.”
SmarDex is a decentralized DeFi platform, much like Binance but without any central authority. It started as a DEX that corrected fleeting losses and grew into a full ecosystem offering a yield-generating synthetic dollar, peer-to-peer lending, and an AI financial assistant.
“Feeding the real economy” challenge
What has changed to make DeFi the benchmark in this booming online lending market?
“Transparency and programmatic risk control made it more attractive than CeFi, that’s for sure,” said Kai Tai Changco-founder and COO of Yalaa Singapore-based startup that aims to turn idle Bitcoin into yield-generating collateral for online lending marketplaces.
“Aave will be the backbone of all credit. Mortgages, credit card loans, consumer loans, business loans, sovereign debt. DeFi powers the real economy.” — Stani Kuleshovfounder and CEO of Aave, posted on on November 25, 2025.
In DeFi, collateral, borrowing limits, and liquidations are visible on-chain and enforced by smart contracts. “I think this visibility has proven its value after the bankruptcies and restructurings of several CeFi lenders,” Chang said. “DeFi’s share has increased because borrowers and lenders prefer systems where counterparty and remortgaging risks are minimized by design. Volumes have returned in 2025, and I believe the combination of transparency and efficiency has brought liquidity back on-chain.”
Cryptocurrency holders can use their tokens as collateral to obtain loans. They cannot use the entire value of their Bitcoin holdings, for example, to obtain a loan. And their position used as collateral is frozen until the debt is repaid, unlike a traditional lender’s secured loan, where a borrower can get a lower rate if their loan is backed by funds they have in cash accounts such as savings accounts and bank CDs.
The most tradable DeFi tokens are Uniswap (CRYPTO: UNI)Pancake Swap (CRYPTO: CAKE) and Aave. They all have unexecuted Bitcoin (CRYPTO: BTC) since the start of the year, with UNI and AAVE having lost almost half their value since January. Over a 12-month period, CAKE and AAVE outperformed BTC, likely in part due to investors buying into the CeFi theme dethroning DeFi.
The total value locked in DeFi reached $159 billion in August, up 84% over the summer. It reached $166 billion on October 5 before falling over the past month, accompanied by a general sell-off in digital asset markets.
CeFi lending volumes remain well below their peak. CeFi loan portfolios have grown from around $35 billion at the start of 2022 to around $9.9 billion as of late, according to Galaxy Research. On-chain metrics show that DeFi has overtaken CeFi in key areas. Decentralized lending protocols now account for more than half of the total crypto lending market share (~57% compared to ~43% for CeFi in Q1 2025).
Attached (CRYPTO:USDT)LednAnd First two are the top three lenders based on the value of outstanding loans, according to Galaxy Research.
The risks of borrowers and investors have not disappeared with DeFi. They have changed but are becoming more measurable:
- Smart contract and governance risk: a bug or malicious governance action can harm markets. Independent audits, formal verification, and large bug bounties are essential. Concentrated token voting is a real governance problem in many DAOs.
- Oracle Risk and Liquidation: Fast markets can lead to bad price movements, triggering cascades. Protocols mitigate this problem through resilient oracles and conservative LTVs.
- Liquidity risk: Extreme events can reduce liquidity and widen liquidation slippage.
- Regulatory risk: Places touching on fiat currencies, Know-Your-Client regulations, and real-world safeguards face evolving rules on a global scale. “Even purely on-chain protocols experience second-order effects via bridges, frontends, and stable rails,” Chang warns.
Perhaps the most well-known risk is bugs or vulnerabilities in the protocol code that can be exploited by attackers to steal funds. Unlike traditional finance, there is no FDIC insurance or readily available recourse when a DeFi contract is hacked – funds can disappear irreversibly.
Risks and rewards for DeFi investors
In the first half of 2025 alone, cryptocurrency hacks resulted in losses of more than $3.1 billion, already surpassing the 2024 total, according to Estonia-based cryptocurrency security firm: Hack (CRYPTO: HAI). They said the first half of 2025 saw the “worst DeFi quarter in years” for exploits, with Uniswap also breached.
In spring, the Cetus DEX on Mysten Labs Sui (CRYPTO: SUI) The platform was hacked, losing $223 million in just 15 minutes, making it one of the biggest DeFi leaks of the year.
Even well-audited protocols are not immune: flash loan attacks, oracle manipulations, and coding errors have hit various DeFi platforms. This constant threat means investors risk losing their tokens to cybercriminals and borrowers could still owe money to the platform.
As a result, DeFi exists in a legal gray area with the risk that financial regulators will crack down on them to protect investors.
For example, the Mango markets exploitation case – where a named sole trader Abraham Eisenberg manipulated the Mango DeFi exchange in 2022 – led to ongoing lawsuits, still raising questions about whether such exploits violate fraud laws, even if people lost funds as a result.
“The main danger is not the code – even if billions were stolen in the hack of smart contracts in 2025; it is the regulatory risk,” said Rausis of SMARDEX in Switzerland. “Global governments considering stablecoins could impose restrictions. I think this will be the biggest threat to the DeFi system.”
Long-time Pancake Swap holders have been greatly rewarded. Despite being well below its 2021 high, CAKE has returned more than 500% to investors compared to five years ago. Not only does this beat its CeFi rivals, but it has also offered investors better returns than Bitcoin and Ethereum.
Benzinga Disclaimer: This article is from an external, unpaid contributor. It does not represent reporting by Benzinga and has not been edited for content or accuracy.
