Author: Silvio

Compiled by: Saoirse, Foresight News

The $1 in bank deposits generates 10 times the revenue for banks compared to the equivalent amount of USDC on Aave. This phenomenon might seem detrimental to the DeFi lending sector, but in reality, it reflects more the current structural characteristics of the cryptocurrency market than the long-term potential of on-chain lending.

 Net interest margin is a metric for measuring the profitability of deposits. Aave, a bank under FIDC and Blockworks, is an example.

This article will explore the following questions: how current lending protocols are actually used, why their profit margins are structurally lower than those of banks, and how this situation may change as lending gradually moves away from the crypto-native leverage cycle.

The role of on-chain lending

My first job involved analyzing bank books and assessing borrower qualifications. Banks channel credit to real businesses, and their profit margins are directly linked to the macroeconomy. Similarly, analyzing borrower profiles in decentralized finance protocols helps in understanding the role of credit in the on-chain economy.

 Aave Outstanding Loan Data Chart

Aave's outstanding loan balance has exceeded $20 billion, a remarkable achievement—but why do people borrow money on the blockchain?

Aave borrower's actual use

Borrowers' strategies can be divided into four categories:

1. Borrowing WETH using interest-bearing ETH as collateral: The yield on staking ETH is usually higher than that on WETH, creating a structured basis trade (essentially "borrowing WETH and still earning a yield"). Currently, this type of trade accounts for 45% of total outstanding loans, with most of the funds coming from a few "whales." These wallet accounts are mostly associated with ETH staking issuers (such as EtherFi platforms) and other "circular stakers." The risk of this strategy is that WETH borrowing costs can surge, which could quickly cause the collateral health to fall below the liquidation threshold.

 Based on the WETH lending rate chart: if the rate remains below 2.5%, basis trading could be profitable.

2. Stablecoin and PT revolving stakers: Similar basis trading can be formed using interest-bearing assets (such as USDe), with yields potentially higher than the borrowing costs of USDC. This type of staking strategy was very popular before October 11th. While structurally attractive, this strategy is highly sensitive to changes in funding rates and protocol incentive policies—which explains why the size of such trades shrinks rapidly when market conditions change.

3. Volatility Collateral + Stablecoin Debt: This is the most popular strategy, suitable for two types of needs: first, those who want to leverage their cryptocurrency holdings; and second, those who want to reinvest borrowed stablecoins into high-yield "liquidity mining" for basis trading. This strategy is directly related to mining rewards and is also the main source of demand for stablecoin lending.

4. Other remaining types: including "stable collateral + volatility debt" (used for shorting assets) and "volatile collateral + volatility debt" (used for currency pair trading).

 1) Weight distribution of Aave wallet lending strategies; 2) Distribution of the number of wallets corresponding to each strategy.

 Collateral health chart weighted by loan amount

For each of the strategies described above, there exists a value chain comprised of multiple protocols: these protocols leverage Aave to streamline the transaction process and distribute profits to retail users. This integration capability is now a core competitive advantage in the cryptocurrency lending market.

Among them, the "volatility collateral + stablecoin debt" strategy has the largest marginal contribution to interest income (borrowing income from USDC and USDT accounts for more than 50% of total revenue).

 Interest income percentage chart by asset type

While some businesses or individuals do use cryptocurrency loans to finance their operations or real-life expenses, the scale of such practical applications is very limited compared to uses for "leveraging on-chain leverage/yield arbitrage".

Three core factors driving the growth of lending agreements:

On-chain revenue opportunities: such as new project launches and liquidity mining (e.g., mining activities on the Plasma platform).
Structured basis trading with deep liquidity: such as the ETH/wstETH trading pair and stablecoin-related trading;
Partnerships with major issuers: These partnerships can help open up new markets (e.g., the combination of pyUSD stablecoin and RWA).

The lending market is mechanicically directly linked to "crypto GDP" (with a beta correlation), just as banks are essentially a barometer of "real-world GDP." When cryptocurrency prices rise, yield opportunities increase, the scale of interest-bearing stablecoins expands, and issuers adopt more aggressive strategies—ultimately driving revenue growth for lending protocols, increasing token buybacks, and boosting the price of Aave tokens.

 Chart showing the correlation between lending market valuation and revenue: Lending market valuation is directly related to revenue.

Comparison between banks and on-chain lending markets

As mentioned earlier, the return efficiency of $1 in a bank is 10 times that of $1 USDC on Aave. Some believe this is a negative signal for on-chain lending, but in my view, it is essentially an inevitable result of market structure for three reasons:

Financing costs are higher in the crypto space: banks' funding costs are based on the Federal Reserve's benchmark interest rate (which is lower than Treasury yields), while USDC deposit rates on Aave are typically slightly higher than Treasury yields;
Traditional commercial banks' risk transformation activities are more complex and should therefore command a higher premium: large banks need to manage billions of dollars in unsecured loans to businesses (such as financing data center construction), and this risk management is far more difficult than "ETH revolving staking collateral value management," so they should deserve higher returns;
Regulatory environment and market dominance: The banking industry is an oligopoly with high user switching costs and barriers to entry.

Decouple lending from the "cycle binding" of cryptocurrencies.

Successful cryptocurrency tracks are gradually decoupling from the inherent cycles of the crypto market. For example, the open interest in prediction markets continues to grow even amidst price fluctuations; the same is true for stablecoin supply, which exhibits far lower volatility than other assets in the crypto market.

To better align with the operating model of the broader credit market, lending agreements are gradually incorporating new types of risk and collateral, such as:

Tokenization of RWA and stocks;
On-chain lending originating from off-chain institutions;
Using stocks or real-world assets as collateral;
Structured underwriting is achieved through encrypted native credit scoring.

Asset tokenization has created conditions for lending to become a "natural endpoint" in the crypto space. As lending becomes decoupled from price cycles, its profit margins and valuations will also break free from cyclical constraints. I expect this shift to begin to appear in 2026.

Data: Aave’s net deposits exceed $20 billion, almost twice the total of all other lending protocols

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