Q3 2025 Encryption Leverage and Decentralized Finance Report: What Impacts and Insights Have KlarnaUSD and Aave App Had on the Market?

Written by: insights4.vc

Compiled by: Glendon, Techub News

Cryptocurrency collateral leverage hit a new high in the third quarter of 2025, exceeding the peak at the end of 2021 in dollar terms, but the market structure has fundamentally changed since then. On-chain lending now dominates, with significantly improved transparency and collateral quality compared to the opaque boom period of 2021. Meanwhile, the lines between credit and payments are blurring: fintech companies are launching their own stablecoins, and DeFi protocols are expanding upwards to offer bank-like applications aimed at retail users.

This report will independently analyze these trends, including the expansion of cryptocurrency leverage, the launch of Klarna's stablecoin KlarnaUSD, and Aave's entry into consumer finance through high-yield applications, while exploring the impact of these trends on market structure, opportunities, and risks.

Overview of Cryptocurrency Leverage in Q3 2025

Market size reaches a new high: the outstanding balance of cryptocurrency collateralized loans grew by approximately $20 billion in the third quarter, reaching about $73.6 billion by the end of September 2025, marking a record high for the quarter-end, with a quarter-on-quarter growth of approximately 38%, and up about 6% from the peak at the end of 2021. Decentralized Finance (DeFi) lending protocols contributed to the major growth. The value of loans on DeFi platforms increased by approximately 55% during the quarter, reaching about $41 billion (a historical high).

Centralized cryptocurrency lending institutions (CeFi) have contracted after the credit events of 2022, but there has been some expansion recently—outstanding loans rebounded by approximately 37% quarter-on-quarter, reaching about $24.4 billion—yet the size of the CeFi lending market remains significantly smaller than its peak in 2021-2022. Additionally, at the end of the quarter, there were approximately $8 billion to $9 billion in cryptocurrency collateralized debt existing in the form of on-chain collateralized debt positions (CDP) stablecoins (such as DAI, LUSD). When combined, the total amount of cryptocurrency collateralized lending market, including DeFi lending, CeFi lending, and cryptocurrency-backed stablecoin supply, is slightly above $73 billion, nominally recovering to roughly the peak levels of late 2021.

Cryptocurrency Lending and Credit Market Map (Source: Galaxy)

The key difference compared to the previous period is the shift towards on-chain trading venues. By the end of Q3 2025, approximately 66-67% of cryptocurrency loans are expected to be completed on-chain through DeFi lending protocols or CDP stablecoin issuance, a significant increase from about 48%-49% at the peak of the Q4 2021 cycle. In the on-chain trading space, decentralized lending applications currently account for over 80% of outstanding on-chain debt, while cryptocurrency-backed stablecoins represent only about 16%. In other words, most on-chain leveraged trading today is done by borrowing existing stablecoins (such as USDT, USDC, etc.) on lending platforms using cryptocurrencies as collateral, rather than issuing new synthetic stablecoins like in 2021.

Currently, DeFi lending protocols account for over half (about 50%) of the cryptocurrency mortgage market, while CeFi lending platforms have seen their share drop to about one-third (around 30%), with CDP stablecoins accounting for about 10-12%. As a result, on-chain platforms occupy about two-thirds of the market share. This shift is significant because both transparency and risk control have improved—on-chain loans are visible in real-time and typically have sufficient collateral, whereas the previous CeFi boom was filled with a large number of hidden, under-collateralized loans. Therefore, the surviving CeFi participants have also raised their standards (shifting to fully collateralized or structured trades), but the market focus has clearly shifted to more transparent DeFi platforms.

In the third quarter, multiple factors drove the expansion of DeFi lending. Incentive programs and airdrop “points” played a certain role. Many users kept their loan accounts open to earn rewards or gain potential token airdrop opportunities. For example, some protocols offer a points system for borrowers, thereby increasing effective yield and encouraging leveraged operations. Additionally, the introduction of higher-quality collateral assets has made it possible for more capital-efficient strategies. Pendle's Principal Tokens (PTs) are a typical example; they are a low-volatility yield-bearing asset. Users can use PT as collateral with relatively stable collateral to borrow stablecoins at a higher loan-to-value ratio. This makes certain leveraged stablecoin “arbitrage trading” strategies (for instance, borrowing stablecoins against PT as collateral for reinvestment to gain returns) more attractive.

In addition, the market environment is also very favorable. The price increases of major crypto assets (BTC, ETH, SOL, etc. have all risen this quarter) have enhanced the value of collateral and may have stimulated borrowing behavior. As asset prices rise, borrowers have greater borrowing capacity and confidence, while lenders are also more willing to issue loans using top crypto assets as collateral. This positive feedback loop—higher crypto prices lead to higher collateral values, which in turn promotes borrowing—further drives the momentum of on-chain lending development.

New chain and leverage growth

The innovation of blockchain infrastructure has also played a driving role. In the third quarter, new networks such as Plasma emerged and quickly attracted a large amount of lending activity. In fact, the Plasma blockchain was launched for only about five weeks, and by the end of October, its outstanding DeFi loans had exceeded $3 billion, indicating that users would rapidly migrate funds to new platforms that offer yield opportunities. As of October 31, the deployment of the Aave protocol on Plasma accounted for about 69% of the lending share on that chain, making Plasma Aave's second-largest market (surpassing some established networks). This example shows that new chains (which often provide low fees or specific incentives) can accelerate leveraged growth by attracting liquidity and borrowers seeking advantages.

CeFi-DeFi Recalculation

One point to note in the analysis is that there may be double counting in the loans between CeFi and DeFi. Some centralized lending institutions have been leveraging DeFi protocols as sources of funding; for example, a CeFi platform may stake its BTC on Aave to borrow on-chain USDC, and then lend those USDC to off-chain clients. In the aggregated data, the same loan may appear twice: once in the DeFi outstanding loans and once on the balance sheet of the CeFi lending institution as receivables from its clients. Without clear disclosure, it is difficult to eliminate these overlaps. Researchers at Galaxy have noticed this issue and emphasized that while on-chain lending statistics are transparent, reports from CeFi are inconsistent, and the recent growth may be a result of the circulation of funds between CeFi and DeFi ledgers. Therefore, the aforementioned major data should be taken with caution—if this fund circulation is significant, the actual independent loan scale in economic terms may be slightly lower. Nevertheless, the overall trend is clear: cryptocurrency leverage is growing again, but it is more collateralized and driven on-chain than in the previous cycle.

KlarnaUSD and the scale of the stablecoin network

The expansion of crypto lending is inextricably linked to the evolution of digital payment systems. Stablecoins, which were once primarily used for cryptocurrency trading, have now facilitated trillions of dollars in transactions and attracted participation from mainstream fintech companies. The launch of the stablecoin KlarnaUSD by the large Swedish fintech company Klarna highlights the trend of integration between leverage, credit, and payments. With the growth of on-chain lending, payment networks based on stablecoins are also thriving, providing liquidity and collateral for DeFi.

Klarna's stablecoin strategy

Klarna, a globally renowned “Buy Now, Pay Later” (BNPL) and consumer payment provider, announced the launch of the dollar-backed stablecoin KlarnaUSD at the end of the third quarter of 2025. This move marks a significant strategic expansion for the company, whose CEO had previously expressed skepticism about cryptocurrencies. Klarna has evolved from a BNPL specialist to a broader consumer fintech company (offering shopping apps, banking services, etc.), and the issuance of the stablecoin is part of its initiative to enter the global payment infrastructure space. KlarnaUSD is designed as a fiat-backed digital dollar that can be used for daily payments and cross-border transactions within the Klarna ecosystem, and may also be used by external partners. According to the company, the token will be fully backed 1:1 by its reserves of dollars. This means that reserves may be held in the form of cash or cash equivalents (such as insured bank deposits or short-term government bonds), but detailed disclosure of the reserve composition and certification frequency is crucial for assessing risk. By launching the dollar stablecoin, Klarna effectively provides over 100 million users with a way to transact seamlessly on the blockchain without volatility, integrating the speed and low cost of crypto networks into a regulated fintech environment.

Technical and reserve settings

KlarnaUSD will operate on Tempo, a new payment-oriented blockchain co-developed by payment processor Stripe and cryptocurrency venture firm Paradigm. Tempo is an independent chain built specifically for large payment transactions, designed to provide fast, low-cost, and compliant stablecoin transfer services at scale. KlarnaUSD is issued through Bridge's “Open Issuance” mechanism, with Bridge being a stablecoin infrastructure platform (which is now owned by Stripe after its acquisition for $1.1 billion). Bridge provides the backend for minting and redeeming stablecoins, compliance checks, and the connection between traditional banks and blockchains. In practice, users can buy/redeem KlarnaUSD through Klarna's app, with Bridge handling the issuance of on-chain tokens when users deposit USD and destroying the tokens when users withdraw USD.

KlarnaUSD is currently in the testing phase (conducted on the Tempo test network until the third quarter of 2025) and is expected to launch on the Tempo mainnet in 2026. During this pilot phase, Klarna is working closely with Stripe's cryptocurrency team to integrate stablecoins into its product processes and ensure robust risk management before a full public release. Reserve management will be a key aspect: Klarna needs to store the dollar reserves supporting KlarnaUSD in trusted institutions and may provide certifications or audits periodically, similar to USDC or USDT, to build user trust. The transparency of these reserves and regulatory oversight will likely follow emerging stablecoin frameworks (notably, new laws such as the proposed U.S. GENIUS Act and the European MiCA regulation set standards for issuers). Klarna's initiative indicates that as long as there are sufficient reserves and compliance with relevant regulations, stablecoins issued by enterprises are gradually becoming a reasonable extension of fintech business models.

Ecosystem Partners: Stripe, Bridge, and Paradigm

The launch of KlarnaUSD has been supported by three important partners, each playing a key role in the implementation of stablecoins:

Stripe: As one of the largest payment processors in the world, Stripe has achieved the instant distribution of KlarnaUSD by integrating it into its existing merchant network and API, allowing millions of online retailers to accept this stablecoin through familiar integration methods. Merchants do not need to learn blockchain technology; they simply need to enable stablecoin payment functionality, and Stripe's infrastructure will handle payments, compliance, and fraud control.

Bridge (a subsidiary of Stripe): Bridge provides the core infrastructure for the issuance and management of KlarnaUSD, including reserve custody, minting/burning, wallet control, and on-chain compliance features (such as freezing and blacklisting). It connects the banking system with the Tempo blockchain, ensuring that each token is backed 1:1 by US dollars. Bridge is applying for a National Trust Bank license in the United States, marking its progress toward operating as a regulated institutional-grade stablecoin.

Paradigm: Paradigm is a leading crypto venture capital firm that co-launched the Tempo blockchain with Stripe, possessing deep on-chain expertise and ecosystem resources. Its involvement has helped position KlarnaUSD as an open and interoperable stablecoin that can integrate with DeFi platforms and other blockchains, highlighting the trend of convergence between fintech, venture capital, and crypto infrastructure in this model.

The annual trading volume of stablecoins reached 27 trillion US dollars.

When announcing the launch of KlarnaUSD, the company highlighted an astonishing figure: the annual transaction volume of global stablecoins is estimated to have reached $27 trillion. This figure (derived from a study by McKinsey) likely measures the total transaction volume of all stablecoins on-chain transfers within a year. It reflects the enormous scale of these digital dollar networks. For reference, $27 trillion is on the same order of magnitude as the transaction volume of major credit card networks. For example, Visa's total payments for the fiscal year 2024 are approximately $16 trillion, and even when including MasterCard (around $10 trillion), it approaches $20 trillion. In other words, despite the drastically different usage patterns, the dollar value processed by the stablecoin networks each year is already comparable to the sum of the Visa and MasterCard systems. The transaction volume of stablecoins also far exceeds that of traditional cross-border remittances, which amount to about $0.8 trillion to $1 trillion annually on a global scale, even surpassing the GDP of the United States.

However, it is essential to be cautious when interpreting the $27 trillion trading volume. The trading volume of stablecoins is not the same as the economic payment volume in retail terms; most of its trading volume comes from the internal flow of funds within the cryptocurrency market. For example, one dollar of stablecoin can be transferred dozens of times daily between exchanges, DeFi protocols, and wallets, thus inflating the original metrics of trading volume. These transfers include arbitrage trades, liquidity providers' fund movements, and internal fund transfers, rather than just the purchase of goods or services.

In contrast, the transaction volume of bank card networks mainly reflects the spending or cash withdrawal of end users on goods/services. Therefore, although the scale of stablecoins has reached levels comparable to mainstream payment networks, a large portion of the $27 trillion transaction volume consists of financial activities within the crypto ecosystem (trading, collateral transfers, yield farming), rather than new commercial activities. Nevertheless, its growth trajectory is still impressive and has the potential to surpass traditional networks by the end of this decade (as predicted by McKinsey), indicating that even a small portion of stablecoin transaction volume shifting to retail payments and cross-border use could pose challenges to traditional payment channels.

The impact of stablecoin regulatory mechanisms on leverage and credit

The rise of stablecoins issued by companies like KlarnaUSD may have a significant impact on the on-chain credit landscape. First, if KlarnaUSD gains widespread adoption (for example, millions of Klarna retail users start holding it for payments, or merchants begin to settle in it), there will naturally be a demand to earn returns on idle balances. Just as holders of USDC or USDT seek out DeFi lending markets to earn interest, KlarnaUSD may also become a new type of financing asset in DeFi. We may see KlarnaUSD integrated as collateral or lendable assets into money market protocols (such as Aave, Compound, etc.). This will facilitate a leveraged cycle: users (even Klarna's corporate treasury) can deposit KlarnaUSD into DeFi lending pools to earn returns, which in turn will support more on-chain lending activities.

If Klarna or its banking partners provide convenient channels for deposits and withdrawals, it can effectively inject fresh capital into the DeFi system, potentially increasing liquidity and reducing the cost of funds for borrowers. Secondly, KlarnaUSD will enter a competitive field dominated by Tether (USDT) and USD Coin (USDC). Currently, these two stablecoins are the primary stablecoins used as collateral and liquidity for loans in DeFi. KlarnaUSD is supported by the large fintech company Klarna, which can coexist with them by carving out niche markets (for example, being favored in certain payment scenarios or regions) or compete directly after gaining sufficient trust and liquidity. Unlike USDC or USDT, which are aimed at native cryptocurrency users, KlarnaUSD may attract more non-crypto users to use stablecoins. This can expand the participant base in on-chain finance; for instance, Klarna app users may eventually be able to deposit their KlarnaUSD into Aave through integration without needing to understand what Aave is, simply because of higher savings rates. This situation will increase the pool of funds available in the DeFi lending market.

Aave App: A new type of banking product driven by DeFi

How DeFi is packaged for end users, the final piece of this puzzle has been completed by Aave. As one of the largest DeFi lending protocols, Aave launched a significant strategic initiative in the third quarter of 2025 - the Aave App, a consumer-facing mobile application that offers bank-like services (savings accounts, payments), fully driven by DeFi underneath. This development reflects the trend of DeFi projects vertically integrating user experience and could significantly accelerate retail participation in the on-chain lending market. This article will delve into Aave's new application, its features and mechanisms, and its impact on the scale and risks of cryptocurrency leverage.

DeFi-based “new bank”

The Aave App is positioned as a high-yield savings product, with an operating experience similar to that of a standard digital bank account. It allows ordinary users to deposit funds (via bank transfer, bank card, or stablecoin) and earn interest without the need to directly operate a crypto wallet or smart contract. Essentially, Aave leverages its decentralized liquidity market to provide yields to retail customers through a simplified interface.

The main features of the Aave App include:

High Attractiveness Yield: The application claims a savings annual interest rate of up to about 9%, far exceeding ordinary bank rates (many banks in the market offer rates of about 0.5% to 4%). This advertised rate includes some bonuses - for example, users who complete identity verification (KYC), set up fixed deposits (automatic savings), or refer friends can unlock higher annual interest rate tiers, up to about 9%. The base rate available to all users is also quite considerable (reportedly around 5% to 6.5% at the initial launch), even surpassing many money market funds. The Aave App's interest is compounded in real-time (interest calculated per second based on the deposit balance), enhancing the experience of “funds always at work” in modern fintech applications.

Large Balance Protection: To alleviate concerns over trust, Aave offers users deposit insurance of up to $1 million as “balance protection.” This loss coverage far exceeds typical bank deposit insurance (for example, the Federal Deposit Insurance Corporation (FDIC) has an insurance limit of $250,000). Although the public information does not specify the exact mechanism, it is likely that Aave reserves funds or purchases insurance to provide protection in case users suffer certain losses (such as smart contract failures or the bankruptcy of custodians). This feature aims to enhance consumer confidence, indicating that even when funds ultimately flow into DeFi, there is safety net.

However, it is important to note that this is not a government-backed insurance, but a contractual guarantee provided by Aave or its affiliates. The $1 million cap indicates that Aave's target customers are affluent retail depositors, aiming to differentiate itself from emerging banks by offering protection for balances well above the usual thresholds. However, the robustness of this guarantee (which specific risks are covered and which entity provides the backing) remains to be seen.

Wide connectivity and convenience: The Aave App has integrated with multiple banks and payment networks, supporting over 12,000 banks and debit cards for account funding. This means users can link their existing bank accounts for transfers via ACH or open banking APIs (possibly using banking connection services like Plaid or Stripe), or make instant deposits using debit cards. This extensive connectivity makes the registration process very convenient, allowing users to start without needing to hold cryptocurrency beforehand; they can fund the app directly from fiat accounts. The app also supports direct deposits of stablecoins, enabling cryptocurrency users to deposit USDC or other supported stablecoins as needed.

It is worth noting that KYC (Know Your Customer) verification is part of the registration process—Aave requires identity verification, which aligns with its provision of quasi-banking products and ensures compliance with regulatory requirements (as mentioned earlier, completing KYC verification can also yield an enhanced annual yield as a reward). The Aave App aims to create a standard fintech savings application experience by abstracting the complexities of crypto, where “cryptographic technology operates in the background,” and users do not need to engage directly. The withdrawal function is available on demand, with no lock-up or penalties. Aave emphasizes that users can withdraw funds at any time without waiting or adhering to any additional terms, addressing pain points faced by some centralized finance yield platforms due to withdrawal restrictions.

Yield Generation

How does Aave provide an annual percentage yield (APY) of approximately 5-9% in a sustainable manner? On the front end, user deposits in the Aave App are likely directed to Aave's decentralized lending market (and potentially related DeFi yield strategies). When users deposit USD (or stablecoins) in the App, these funds are converted into stablecoins (if not already converted) and supplied to liquidity pools on Aave (potentially across multiple blockchain networks operated by Aave) to earn interest from borrowers. Therefore, the yields offered to users are primarily driven by on-chain borrowing demand: borrowers on Aave pay interest (for example, borrowing USDC for leveraged trading or borrowing stablecoins for mining), and this interest is used to pay the annual yield on deposits.

In the third quarter of 2025, the average lending rate of on-chain stablecoins is in the mid-single digits (as of the end of the quarter, the weighted stablecoin lending rate is approximately 4.8%-5.0%). Aave may optimize the market for liquidity deployment – for instance, if the yields on Aave on Polygon or other chains are higher than those on the Ethereum mainnet, the backend might allocate more user funds to these markets. Besides the basic lending rates, there may be other sources of yield or incentives: Aave might enhance yields through native token rewards (although Aave's recent liquidity incentives have been relatively moderate), or by integrating with other yield opportunities to boost returns (for example, part of the funds could be used for staking yields on liquid staking tokens, or for lending pools of real-world assets that sometimes offer higher rates). Another possibility is that Aave is subsidizing initial yields (as a marketing expense) to attract users, essentially a promotional rate. Mentioning that certain actions can earn additional annual yields (e.g., automatic savings can increase the annual yield by 0.5%) indicates that some of the yields are not entirely market-driven, but rather Aave's autonomous rewards.

In the long run, sustainable yield will depend on market conditions: if the crypto market is active and leverage demand is strong, borrowing rates (as well as deposit annualized yields) will remain high; if demand declines, rates may decrease. The current base yield of around 5-6% may reflect natural borrowing demand (perhaps driven by factors such as the point incentives mentioned earlier) and the comprehensive results of efficient cross-chain deployment. Aave's acquisition of fintech developer Stable Finance indicates that they have built the infrastructure to manage these deployments and may hedge or underwrite certain risks. In terms of liquidity and withdrawals, Aave Labs (the company behind the application) may maintain a certain buffer of funds or use its own liquidity to ensure users can withdraw instantly. If a large number of users withdraw simultaneously, Aave may temporarily prioritize processing withdrawals from the underlying DeFi (which may involve blockchain transaction times or slippage) to maintain a smooth user experience.

Under extreme pressure, such as a DeFi market crash or soaring borrowing costs. The risk lies in the potential widening or even reversal of the spread between the interest paid by borrowers and the returns promised to users by Aave. The application is likely to include a disclaimer about interest rate fluctuations. If the on-chain market “freezes” (such as liquidity depletion or smart contract suspension), Aave will have to pause new activities or even suspend withdrawals until the underlying funds are restored. These are known risks of integrating DeFi into retail products, and how Aave responds to stress scenarios will be a key test. Nevertheless, with a diversified market and potential capital reserves, the application can provide daily liquidity under normal circumstances, essentially serving as a DeFi yield entry point with a smoothing layer.

Competitive Landscape

The Aave App has entered a highly competitive market that includes both traditional fintech products and crypto-native products:

Traditional banks and new digital banks

Traditional bank savings rates remain very low (usually below 1% annual interest rate), and even high-yield savings accounts or time deposits rarely exceed 4-5%. Fintech neobanks (such as Chime, Revolut, or N26) sometimes partner with banks to offer higher yields, but usually only in single digits and often with caps or additional conditions. The approximately 5-9% yield offered by the Aave App directly challenges these traditional bank rates. Furthermore, the $1 million deposit insurance provided by Aave far exceeds the coverage limits of most fintech companies or banks (with a limit of $250,000 in the US and €100,000 in the EU). However, the downside of this model lies in regulation and trust: banks have decades of regulation and government guarantees, and many risk-averse customers are more likely to choose banks even with lower yields. The Aave App may initially attract those seeking high returns and tech-savvy users rather than typical savings account holders, at least until it proves itself over time.

Centralized cryptocurrency yield platform

In the previous cycle, CeFi lending platforms like Celsius and BlockFi offered retail yields on cryptocurrency deposits (around 5-10%), but these models collapsed in 2022 due to high-risk re-hypothecation and lack of transparency. The Aave App can be seen as a next-generation DeFi native solution. It aims to provide similar or even higher yields but adopts non-custodial, transparent collateral (all deposits are ultimately stored in visible smart contracts, and loans are also over-collateralized). Notably, Aave's solution avoids the maturity mismatch issue that plagues centralized finance lending platforms (long-term loans with instant withdrawals). By using on-chain liquidity markets designed for instant liquidity (with floating rates), the Aave App's model is more robust, but not completely risk-free. Additionally, there are other participants, such as exchanges (for example, the USDC savings product offered by Coinbase, with an annual yield of around 5%, or various yield programs). These schemes are simpler but have lower yields and require custody. The Aave App attempts to combine the trust-minimized characteristics of DeFi with a user-friendly interface, which, if executed well, could become a significant differentiating advantage.

Other DeFi-driven retail applications

Aave is not the only project trying to package DeFi as a mainstream user service. For example, some startups and protocols have launched debit cards or similar banking platforms linked to DeFi yields (one example mentioned in industry news is a staking service on Ethereum that launched a crypto cash card similar to an American Express card, as well as the Mantle network, which launched a “digital banking” app that provides integrated cryptocurrency banking accounts). Additionally, projects like Compound Treasury offer institutions a fixed yield of 5% on USDC (but are not aimed at retail users), while projects like Maple or Goldfinch target the institutional loan market, indicating that the bridge between traditional funds and cryptocurrency yields is continuously deepening.

Aave's advantage lies in its status as a top-tier protocol with a large liquidity base and community. By directly targeting retail users, Aave can weaken the small intermediaries that act as gateways to DeFi. If the Aave App is successful, it could capture market share that originally belonged to third-party fintech companies integrating the Aave API. In fact, Aave is undergoing forward integration of its distribution channels. This could change the economic landscape: Aave does not need to pay all profits directly to fintech partners or users but can use the application to manage profits (which could maintain a certain spread in the future or use the profits to promote the use of the Aave protocol, benefiting the entire ecosystem). Moreover, this could open up new revenue streams for Aave Labs (the company) beyond protocol fees.

The impact of systemic leverage and risk

By lowering the threshold for retail users to gain on-chain yields, applications like Aave can significantly increase the influx of funds into DeFi lending. Even a slight shift of traditional savings towards these products can expand lending capacity, and as liquidity grows, interest rates may decrease over time. On the other hand, DeFi platforms aimed at retail users concentrate technology, smart contracts, and custody risks within the user base, who may not fully understand these risk exposures. As the scale of deposits expands and begins to compete with bank savings, regulators and existing banks may react by either tightening regulatory requirements on yield products or directly participating in the construction of DeFi infrastructure. The regulatory treatment of such applications that lie between banking and investment products remains uncertain, which is a key risk in the medium term.

Summary

The collateralized leverage in cryptocurrency has rebounded to the peak level of the previous cycle, but its nature has changed: compared to 2021, it is more on-chain, more collateralized, and more transparent. Data from the third quarter of 2025 shows that the market size is slightly larger than the previous peak (approximately $74 billion, whereas the peak was $69 billion), with DeFi protocols bearing most of the load, while CeFi lending institutions operate more conservatively. This evolution is driven both by opportunity and necessity—higher cryptocurrency prices and clever incentive mechanisms have opened the door to growth, while past failures have prompted the industry to adopt more favorable practices.