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DeFi in Q3 2025: Record Growth Amid Shifting Leverage Dynamics
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2025-12-17 | 5m
According to Galaxy Research, total crypto leverage expanded significantly, with DeFi playing a central role in this growth. The report highlights how DeFi lending applications surged past previous records, capturing a larger share of the market compared to centralized alternatives.
This period showed DeFi maturing into a dominant force for borrowing and lending in crypto. Onchain borrowing now accounts for the majority of leverage, supported by better incentives, improved collateral options, and rising asset prices. While centralized finance (CeFi) lenders adopted more conservative approaches after past credit events, DeFi protocols attracted substantial capital through points farming and yield opportunities. The quarter ended with crypto-collateralized lending at $73.59 billion, surpassing the previous peak from Q4 2021. DeFi application loans alone grew to $40.99 billion, reflecting strong user demand for transparent, permissionless borrowing.
This analysis draws heavily from Galaxy Research's comprehensive report on Q3 2025 leverage trends. It examines DeFi's performance, key drivers, comparisons to CeFi, interest rate dynamics, and broader implications for the crypto ecosystem. The growth underscores DeFi's resilience and increasing sophistication, even as markets faced volatility toward the end of the year.
Overall Crypto Leverage Market in Q3 2025
Crypto-collateralized lending expanded by $20.46 billion during Q3 2025, a 38.5% increase that brought the total to a record $73.59 billion. This figure exceeded the Q4 2021 high of $69.37 billion by more than $4 billion. The growth was predominantly onchain, with DeFi and other decentralized mechanisms leading the way.
Galaxy Research notes that onchain lending represented 66.9% of the total market by the end of the quarter, a significant rise from 48.6% in Q4 2021. Within onchain borrowing, lending applications accounted for over 80% of activity, while collateralized debt position (CDP) stablecoins like DAI declined to just 16%. This shift indicates users increasingly prefer direct lending protocols over minting stablecoins against collateral.
The market's composition has evolved since the 2021 bull run. Collateral now concentrates in stable assets such as Bitcoin, Ethereum, and Pendle Principal Tokens, reducing exposure to highly volatile tokens. Borrowers use funds more for yield strategies and looping rather than speculative trading. These changes contribute to a healthier leverage environment, where growth occurs under tighter risk parameters.
DeFi Lending: Record Highs and Dominant Share
DeFi lending applications experienced explosive growth in Q3 2025. Outstanding loans rose by $14.52 billion, a 54.84% quarter-over-quarter increase, reaching $40.99 billion by September 30. This marked a new all-time high for DeFi borrowing, highlighting the sector's ability to attract capital during a period of rising crypto prices.
Several factors fueled this expansion. Points farming emerged as a major incentive, where protocols distributed rewards to encourage deposits and borrowing ahead of potential airdrops. Improved collateral types, particularly Pendle Principal Tokens used for stablecoin looping, provided safer ways to generate yield. Additionally, asset price appreciation played a role: Ethereum surged 50% to new highs, Solana gained 33%, while Bitcoin remained relatively stable.
DeFi's market share within combined CeFi and DeFi loans reached 62.71%, up from previous quarters. When including CDPs, onchain activity claimed 66.88% of the total. This dominance reflects growing trust in decentralized protocols, which offer transparency and composability without intermediaries.
New protocol deployments contributed to the growth. JupLend launched on Solana, while established players like Aave expanded to chains such as Plasma. Expansions also included Fluid on Plasma, Dolomite on Botanix, and Euler on multiple networks including Linea and Arbitrum. These developments increased accessibility and liquidity across ecosystems.
Post-quarter, DeFi borrows peaked at $43.82 billion on October 7 before declining 11.55% by the end of October. The newly launched Plasma chain quickly attracted $3 billion in borrows, with Aave capturing 68.8% share and becoming its second-largest instance.
Comparison with Centralized Finance (CeFi)
While DeFi surged ahead, CeFi lending also grew but from a more cautious base. CeFi borrows increased by $6.6 billion, or 37.11%, to $24.37 billion. This represented strong quarterly growth but remained 34.3% below the Q1 2022 peak.
CeFi lenders have become more conservative following the 2022 credit events. Many reduced uncollateralized or undercollateralized lending, implemented stricter risk controls, and focused on fully collateralized loans with greater transparency. Institutional capital now drives much of CeFi activity, prioritizing safety over aggressive yield chasing.
Leading CeFi players included Tether with $14.6 billion in secured loans, representing 59.91% market share. Nexo and Galaxy followed with smaller but growing portions. The top three CeFi lenders controlled over 75% of the segment.
In contrast to DeFi's rapid expansion, CeFi's growth appeared steadier and more controlled. The combined CeFi and DeFi loans totaled $65.37 billion, up 47.72% quarter-over-quarter and surpassing the 2021 high by 22.32%. DeFi's share within this combined view stood at 55.7%, demonstrating its clear lead in driving overall leverage growth.
Interest Rates and Borrowing Costs in DeFi
Interest rates in DeFi showed interesting dynamics during Q3 and into Q4 2025. For stablecoins, the weighted average borrow rate rose from 4.23% at the end of June to 4.83% by October 31. Onchain rates generally tracked below over-the-counter (OTC) mid-rates, which ranged from 5% to 6.5% for USDC before settling around 6%.
Bitcoin borrowing rates declined onchain, with wrapped BTC rates falling from 0.28% to 0.22%. OTC rates for BTC dropped more significantly, from 3% to 1.25%. This compression made Bitcoin borrowing cheaper relative to holding.
Ethereum and staked ETH rates experienced volatility. In July, a large withdrawal of 300,000 ETH from Aave caused temporary spikes, pushing borrow rates above staking annual percentage yields (APY). This briefly disrupted looping strategies where users borrow against staked assets to compound yields. By November, rates stabilized, making looping profitable again as outstanding ETH borrows decreased from around 2.3 million to 2.1 million.
Staked ETH rates often turned low or negative in certain venues, facilitating efficient yield-looping. Overall, DeFi rates remained competitive with CeFi alternatives, often providing better terms for sophisticated users willing to manage onchain risks.
Collateral Trends and Risk Management
Collateral quality improved markedly compared to previous cycles. Borrowers increasingly used stable assets like Bitcoin, Ethereum, and innovative tokens such as Pendle Principal Tokens. These PTs enabled stablecoin looping with reduced volatility exposure, contributing to safer leverage positions.
Galaxy Research emphasizes that no specific lending threshold inherently signals danger. Instead, the quality of collateral and the purpose of borrowed funds matter most. In Q3 2025, funds were largely deployed for yield generation rather than pure speculation, reducing systemic risks.
Liquidations remained manageable during the quarter but spiked post-Q3. On October 10, major protocols saw significant events: Aave V3 on Ethereum experienced $192.86 million in liquidations, its third-highest ever, mostly involving wrapped BTC. Other protocols like Kamino, Fluid, and Morpho also recorded millions in liquidations across various chains.
These events were largely mechanical, triggered by sharp price drops rather than fundamental credit issues. The report distinguishes current leverage from 2021, noting greater collateralization and separation between credit and speculative activities.
Digital Asset Treasury Debt and Corporate Strategies
Digital asset treasury (DAT) companies continued building leverage positions. Tracked debt exceeded $12 billion by quarter-end, with $422 million added during Q3. Leading strategies involved holding significant Bitcoin positions funded partially through debt.
Including DAT debt, total outstanding obligations reached $86.26 billion, another all-time high. Most corporate debt matures between 2027 and 2028, providing a long-term runway for holding strategies. New borrowers emerged, though overall DAT debt growth remained relatively stagnant compared to protocol lending.
This corporate leverage complements DeFi growth, as many treasuries hold assets that serve as collateral in decentralized protocols.
Futures and Perpetuals Markets Context
While the focus remains on lending, futures markets provide important context for overall leverage. Open interest in futures, including perpetuals, rose 41.46% to $187.79 billion by September 30, peaking higher in early October.
Bitcoin futures dominated, followed by Ethereum and Solana. Perpetual futures specifically reached $147.55 billion in open interest. The October 10 liquidation cascade, the largest in history with over $17 billion affected, primarily impacted derivatives markets rather than spot lending.
This event demonstrated how speculative leverage in perps differs from collateralized borrowing in DeFi. Lending markets proved more resilient, with liquidations contained within expected parameters.
Implications and Outlook for DeFi
The Q3 2025 data reveals a maturing DeFi sector capable of sustaining record leverage under improved conditions. Growth drivers like points incentives and innovative collateral suggest continued expansion potential. However, volatility events post-quarter highlight ongoing risks in crypto markets.
DeFi's increasing dominance reshapes market structure, pulling activity away from centralized platforms. This shift promotes transparency and reduces counterparty risk, aligning with crypto's core principles. As protocols expand to new chains and introduce better risk management tools, borrowing accessibility should improve further.
Regulatory clarity and institutional participation could accelerate trends seen in Q3. Meanwhile, borrowers benefit from competitive rates and composable strategies unavailable in traditional finance.
Conclusion
Q3 2025 represented a landmark period for DeFi lending, with record volumes and market share gains driven by strong fundamentals and user incentives. The sector's growth outpaced CeFi significantly, establishing onchain protocols as the primary venue for crypto leverage. While challenges remain, particularly around volatility and liquidations, the quarter demonstrated DeFi's growing stability and importance in the broader ecosystem.
The trends point toward continued innovation and adoption, positioning DeFi as a cornerstone of future crypto finance. Investors and users should monitor protocol developments, collateral quality, and macroeconomic factors influencing borrowing demand.
References:
Galaxy Digital. (2025, November 19). The state of crypto leverage: Q3 2025 market breakdown.
https://www.galaxy.com/insights/research/crypto-leverage-q3-2025-defi-cefi-lending-digital-asset-treasury-debt-futures-perpetuals
CoinCatch Team
Disclaimer:
Digital asset prices carry high market risk and price volatility. You should carefully consider your investment experience, financial situation, investment objectives, and risk tolerance. CoinCatch is not responsible for any losses that may occur. This article should not be considered financial advice.
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