Borrowing activity across major decentralized finance (DeFi) protocols has taken a steep dive as crypto market volatility drives investors to slash leverage and unwind risky bets.
Platforms like Aave and Morpho have seen the total value of outstanding loans drop significantly from their highs in mid-December. With panic sweeping through markets, many users rushed to repay loans or were hit with liquidations as asset prices tumbled.
Stablecoin yields — which reflect what lenders earn by supplying capital — have plunged in response. According to data from vaults.fyi, average DeFi yields on U.S. dollar-pegged assets dropped to just 2.8% on Tuesday, their lowest point in a year. That figure is far below the current U.S. money market average of 4.3% and a dramatic comedown from the 18% yields seen during December’s bull run.
“We’re seeing a classic risk-off shift,” said Ryan Rodenbaugh, CEO of Wallfacer Labs, which operates vaults.fyi. “Borrowing activity has fallen off a cliff as traders step away from leverage.”
The decline in borrowing hasn’t been matched by a drop in deposits, meaning the same pool of lenders is now splitting smaller interest payouts. “It’s a double hit for lenders,” Rodenbaugh noted.
The recent crypto crash accelerated the deleveraging trend. Bitcoin (BTC) and Ethereum (ETH), two of the most popular collateral assets in DeFi lending, sank by 10%-15% over the weekend, falling below $75,000 and $1,500 respectively.
On Aave, the largest DeFi lending platform by total value locked (TVL), more than $110 million in loans were forcibly liquidated between Sunday and Monday, according to Chaos Labs CEO Omer Goldberg.
Sky, formerly known as MakerDAO and issuer of the $7 billion USDS stablecoin, also saw major liquidations. On-chain data revealed that a $74 million DAI loan backed by over 67,000 ETH was wiped out. Another whale, facing liquidation pressure, repaid a large portion of a $66 million loan backed by 65,000 ETH, reducing their debt to $28 million.
According to DefiLlama, Aave’s borrowed value has fallen to $10 billion — down from more than $15 billion just four months ago. Morpho has experienced a similar retreat, with loans dropping from $2.4 billion in December to $1.7 billion this week.
As traders retreat and risk appetite fades, the DeFi sector faces a major recalibration. Whether lending activity can recover hinges on a rebound in crypto market stability — and investor confidence.
