Introduction
The first quarter for DeFi lending was dominated by exploits. Drift was directly exploited for $285 million. LayerZero and KelpDAO were exploited for $290 million, a heist that had downstream effects on Aave as the exploiter used stolen funds as collateral on the app. These events, especially LayerZero/KelpDAO, had a significant impact on lending markets.
In the two weeks following the LayerZero/KelpDAO exploit, Aave saw more than $5.5 billion of stablecoin supply leave the app and $3.1 billion of stablecoin loans close; more than 25,400 units of bitcoin-based assets left the app; and more than 943,000 WETH was withdrawn. Despite the turbulence created by these events, there are a couple of silver linings. Some teams have already taken steps to improve their risk management practices. Historically, the industry has a strong track record of self-regulation and users demanding teams take measures that protect them (as evidenced by the self-directed changes made after the FTX and related blowup). These changes, however, won't happen overnight, and some may choose to ignore them and keep conducting business as usual.
Still, if the past is any guide, we believe that meaningful change may stem from these events and we could be left with a more resilient DeFi ecosystem.
On the CeFi lending side, loan books showed their first signs of deterioration following the Oct. 10 liquidation cascade and negative price action but still ended the first quarter above their Q3 2025 outstanding balances. This is all despite BTC, ETH, and SOL being down 34%, 48%, and 59% respectively since the liquidation event. The decline we are seeing is in line with Galaxy Research’s expectation of gradual deleveraging rather than a wipeout and is a testament to the improved practices of CeFi lenders. Borrowed funds use cases have generally de-risked, un(der)collateralized credit and rehypothecated collateral have been largely self-regulated out of common practice (and were effectively never options onchain), and collateral asset quality has improved, leaving lenders and borrowers better positioned to absorb volatility without forced deleveraging or loss of funds. All of this considered, there are a few headwinds to note for CeFi lenders. One, disruption in DeFi can impose constraints on offchain lenders who rely on onchain markets to serve their clients. Two, negative or choppy price action can disincentivize borrow activity.
Key Takeaways
All told, crypto-collateralized lending contracted by $3.62 billion (-5.1%) in Q1 2026 to $67.42 billion. This is 14.3% lower than the Q3 2025 high of $78.67 billion.
The dollar-denominated value of outstanding loans on DeFi fell for the second consecutive quarter in Q1, contracting by $4.53 billion (-13.82%) to $28.22 billion.
Galaxy Research is tracking more than $17.5 billion in debt outstanding used to directly buy or supplement the treasury strategies of DATs.
Futures open interest (OI), including perpetual futures (perps), declined 12.83% QoQ from $119.52 billion to $104.19 billion. Despite the decline, futures open interest has begun to rebound from the low reached in late February. Since then, it has grown $24.04 billion or 26.62% as of May 1.
Crypto-Collateralized Lending
The market map below highlights some of the major past and present players in the CeFi and DeFi crypto lending markets. Some of the largest CeFi lenders by loan book size crumbled in 2022 and 2023 as crypto asset prices tanked and liquidity dried up. These lenders are flagged with red caution dots in the map below.
CeFi
The table below compares the CeFi crypto lenders in our market analysis. Some of the companies offer multiple services to investors. Coinbase, for example, primarily operates as an exchange but also extends credit to investors through over-the-counter cryptocurrency loans and margin financing. The analysis shows only the size of companies’ crypto-collateralized loan books, however.
As of March 31, Galaxy Research tracked $25.43 billion of open CeFi borrows. This represents quarter-over-quarter (QoQ) contraction of 7.23%, or -$1.98 billion, and $18.59 billion (+271.69%) growth since the bear market trough of $6.8 billion in Q4 2023. Still, CeFi borrows outstanding are 30.47% below their Q1 2022 all-time high of $36.58 billion. Notably, CeFi lending saw its first QoQ contraction since Q4 2023.
The fourth quarter saw most CeFi books compress, with the exceptions of Maple (+$309.59 million or 16.97%), Milo (+11.49 million or 9.36%), Coinbase (+90.04 million or 6.65%), and Nexo (+$11.18 million or 0.63%). Notably, Tether had its first QoQ decline since Q4 2021.
Tether remains the dominant lender in our analysis, commanding a 62.25% share (up 8 basis points from last quarter) of the CeFi lending market. Add in Maple (8.39% market share, up 174 basis points from the fourth quarter), and Nexo (7.02% market share, up 55 basis points), and the top three tracked CeFi lenders control 77.66% of the market (up 229 basis points).
When comparing market shares, it’s important to note the distinctions between CeFi lenders. Some lenders only offer certain types of loans (e.g., BTC-collateralized only, altcoin-collateralized products, or cash loans disbursed in fiat rather than stablecoins), only service certain types of clients (e.g., institutional vs. retail), and only operate in certain jurisdictions. The combination of these factors allows some lenders to scale more easily than others.
The table below details the sources of Galaxy Research’s data about each CeFi lender and the logic we used to calculate the size of their books. While DeFi and onchain CeFi lending figures are retrievable from onchain data, which is transparent and easily accessible, retrieving CeFi data is tricky. This is due to inconsistencies in how CeFi lenders account for their outstanding loans and how often they make the information public, as well as the general difficulty of obtaining this information.
Note, the values supplied by private third-party lenders have not been formally vetted by Galaxy Research.
CeFi and DeFi Lending
The dollar-denominated value of outstanding loans on DeFi lending apps fell for the second consecutive quarter in Q1, contracting by $4.53 billion (-13.82%) to $28.22 billion. Combining DeFi apps with CeFi lending venues, there were $53.65 billion of outstanding crypto-collateralized borrows at quarter end. This represents a reduction of $6.51 billion (-10.82%) QoQ, predominantly driven by compression of onchain borrows.
Note: There is potential for double-counting between total CeFi loan book size and DeFi borrows. This is because some CeFi entities rely on DeFi applications to lend to offchain clients. For example, a hypothetical CeFi lender may pledge its idle BTC to borrow USDC onchain, then lend that USDC to a borrower offchain. In this scenario, the CeFi lender’s onchain borrow will be present in the DeFi open borrows and in the lender’s financial statements as an outstanding loan to its client. The lack of disclosures or onchain attribution makes filtering for this dynamic difficult.
As a result of the quarter-over-quarter decline in outstanding borrows on DeFi lending applications outpacing that of CeFi venues, DeFi’s relative lead over CeFi lending narrowed further in Q1. At the end of Q1 2026, DeFi lending app dominance over CeFi lending venues stood at 52.6%, down 183 basis points QoQ from 54.3% at the end of Q4 2025.
The third leg of the stool, the crypto-collateralized portions of collateral debt position (CDP) stablecoin supply, increased by $2.89 billion (+26.54%) QoQ. Sky’s USDS and DAI were the primary drivers of CDP stablecoin growth, adding $2.88 billion through Q1. Again, there is potential for double-counting between total CeFi loan book size and CDP stablecoin supply, because some CeFi entities might rely on minting CDP stablecoins with crypto collateral to fund loans to offchain clients.
All told, crypto-collateralized lending contracted by $3.62 billion (-5.1%) in Q1 2026 to $67.42 billion. This is 14.3% lower than the Q3 2025 high of $78.67 billion.
At the end of Q1 2026, DeFi lending applications represented 41.85% (-424 basis points from Q4 2025 share) of the crypto-collateralized lending market, CeFi venues captured 37.72% (-87 basis points from Q4 2025 share) of the market, and the crypto-collateralized portion of CDP stablecoin supplies held 20.43% (+511 basis points from Q4 2025 share). Combining DeFi lending apps and CDP stablecoins, onchain lending venues held a 62.28% dominance (+87 basis points from Q4 2025 share) over the market.
Additional Views of DeFi Lending
Outstanding borrows on DeFi lending applications have seen material deterioration since reaching an all-time high of $47.13 billion on Sept. 19, 2025. Sitting at $23.29 billion as of May 1, 2026, onchain lending has collapsed by $23.84 billion, or 50.58%. Ethereum has seen a $19.58 billion decline in open loans on the chain since reaching its all-time high of $37.52 billion in the fall.
The current drawdown in DeFi borrows has eclipsed that of the tariff tantrum-induced drawdown of spring 2025 and is at the same level as March/April 2024.
Stablecoins
The weighted average stablecoin borrow rate declined over the quarter, dropping 92 basis points between Jan. 1, 2026, and March 31, 2026. After quarter end in April, however, stablecoin rates spiked to 7.9% in aggregate as a result of liquidity constraints induced by the rsETH exploit.
This figure is calculated by blending the costs of borrowing from lending protocols and CDP stablecoin mint fees, weighted by outstanding borrows.
The following breaks out the costs of borrowing stablecoins through lending applications and minting CDP stablecoins with crypto collateral. The two rates track each other closely, although CDP stablecoin mint rates are typically less volatile because they are manually set periodically and do not move in lockstep with the market. Both rates have used the Fed Funds Rate as a floor for the last 18-plus months.
Notice the divergence between lending app borrow rates and CDP stablecoin mint fees around the time of the rsETH exploit. CDP stablecoin mint fees stayed effectively unchanged while lending app rates spiked.
Benchmark over-the-counter (OTC) interest rates for USDC remained flat through the quarter at 3.5%. As the rsETH exploit unfolded and onchain rates for USDC blew out, the spread between onchain rates and OTC rates reached its highest point since March 2024.
The chart below tracks the same rates as above, but for USDT lending. Like USDC OTC rates, those of USDT remained flat over the quarter, and the spread between onchain and offchain USDT rates reached their widest point since March 2024 in the wake of the rsETH exploit.
Bitcoin
The chart below shows the weighted borrow rate for wrapped bitcoin (WBTC) on lending apps across several applications and chains. The cost of borrowing WBTC onchain is often low because wrapped bitcoin tokens are primarily used for collateral in onchain markets and are not in high demand for borrowing. In contrast to stablecoins, the cost of borrowing BTC onchain remains stable, because users borrow and repay it less frequently. The rate to borrow BTC onchain increased from 0.22% at the end of Q3 to 0.44% at the end of Q4.
The historical divergence between onchain and offchain (over-the-counter) borrow rates for BTC persisted throughout the third quarter, though offchain BTC borrow rates came down substantially. In the OTC market, BTC borrowing demand is driven primarily by two factors: 1) the need to short BTC and 2) the use of BTC as collateral for stablecoin and cash loans. The former is a source of demand not commonly found in onchain lending markets, hence the spread between onchain and over-the-counter BTC borrow costs.
OTC rates for BTC remained flat through the quarter at 1%.
ETH and StETH
The chart below shows the weighted borrow rate for ETH and stETH (staked ether on the Lido protocol) across several lending applications and chains. The cost to borrow ETH has historically been higher than for stETH because the former is in greater demand. Users repeatedly borrow ETH to fuel looping strategies to gain leveraged exposure to the Ethereum network staking APY, pledging stETH, the token they receive for staking ETH through Lido, as collateral. As a consequence, the cost of borrowing ETH fluctuates within 50 basis points of the Ethereum network staking APY on average under normal conditions. This strategy becomes uneconomical when the cost to borrow exceeds the staking yield, so it is uncommon for the borrow APR to clear the staking APY for extended periods of time.
As with WBTC, the cost of borrowing stETH is often low because the asset is primarily used as collateral and not much else.
By using liquid staking tokens (LSTs) or liquid restaking tokens (LRTs), both of which earn yield, as collateral, users borrow ETH at low, often negative, net interest rates. This cost efficiency fuels a looping strategy where users repeatedly deposit LSTs and LRTs as collateral to borrow unstaked ETH, stake it, and then recycle the fresh LSTs and LRTs to borrow even more ETH, thereby amplifying their exposure to the ETH staking APY. This strategy only works so long as the borrow cost for ETH is below the staking APY achieved on the LSTs and LRTs. Users have mostly been able to conduct this strategy without a hitch outside of a few notable periods.
This trade became uneconomical as WETH borrow costs ballooned under tight liquidity conditions following the rsETH exploit in April.
ETH Over-the-Counter Rates
As with bitcoin, borrowing ETH through onchain lending apps has been historically cheaper than borrowing it over the counter. This is driven by two factors. First, as with BTC, there is borrowing demand from short sellers through offchain venues that is not as common onchain. Also, the Ethereum staking APY serves as a floor rate for offchain borrowing because there is little incentive for suppliers to deposit assets at offchain venues, or for offchain venues to lend assets out, at rates less than staking would earn. By contrast, onchain, the staking APY is often the ceiling rate for lending ETH.
Aave Market Reaction to the rsETH/LayerZero Exploit
The mid-April rsETH exploit caused the largest shock ever to the Aave protocol’s lending markets, and to DeFi as a whole. In its path it left markets built around stablecoins and wrapped ether (WETH) naturally (and synthetically) frozen. As the market became aware of the exploit, users rushed to withdraw their assets, which ultimately pushed utilization rates toward 100% and prevented additional withdrawals.
The result was a large swath of capital flight and liquidity constraints that prevented users from withdrawing their assets. The following is taken from a report published by Galaxy research using its proprietary view into Aave markets.
Stablecoins
In the days following the exploit, stablecoin supplies on Aave V3 Core gradually declined before stabilizing around 4.5 billion native units. Stablecoin deposits leveled on April 24, around one week after the exploit.
The story is nearly identical for stablecoin borrows. There was a gradual grind lower for the first week following the exploit before this metric stabilized around 4 billion units.
The next chart observes stablecoin utilization rates over the April 19-May 3 observation period. While utilization rates didn’t hit 100% in the first six hours, eventually a number of them did. Using a 100-block moving average (MA), it took:
USDT: 2,513 blocks to reach >99% utilization (8h 24m)
USDC: 3,536 blocks (11h 49m)
PYUSD: 4,005 blocks (13h 23m)
USDe: 5,708 blocks (19h 04m)
DAI: 12,758 blocks (42h 39m)
RLUSD: did not reach 100-block MA utilization > 99% at any time in the observed window
For comparison, it took WETH only 678 blocks (2h 16m) to reach a 100-block MA utilization greater than 99%. Utilization rates were sticky at max utilization for a number of stablecoins:
USDT spent 135.19 hours above 99% utilization
USDC spent 97.82 hours above 99% utilization
USDe spent 70.48 hours above 99% utilization
DAI spent 15.82 hours above 99% utilization
PYUSD spent 2.77 hours above 99% utilization
While stickiness varies depending on each asset’s circumstance, WETH utilization stayed over 99% using the 100-block MA for 12.7 days.
Wrapped Ether
WETH utilization stayed structurally elevated and close to the 100% ceiling, with an average around 99.6%, and eased only to about 98.47% by the end of the snapshot period (May 3). The overarching pattern is sustained tightness: even as conditions and the outlook for an exploit resolution improved, utilization did not meaningfully revert to pre-stress levels, indicating liquidity remained constrained relative to borrow demand throughout most of the window.
As for balances, both sides of the trade delevered, but supply contracted significantly more than borrows. Supplied native units fell from roughly 3.01m to 2.06m WETH (about -31.4%), while borrowed native units declined from roughly 2.67m to 2.03m WETH (about -23.7%). That asymmetry leaves only a thin supply-over-borrow buffer for much of the period, which explains why utilization remains near the max despite sizable reductions in absolute borrows and supply outstanding.
Read Galaxy Research’s recent publications on Aave markets’ reactions and the composition of Aave markets for additional context on Aave markets’ reaction to the rsETH/LayerZero exploit.
Corporate Debt Strategies
We are now tracking more than $17.5 billion in debt outstanding used to directly buy or supplement the treasury strategies of DATs. Note, due to constraints in Bloomberg’s tracking of Strategy preferred stock, the timing of the increases in outstanding STRC share issued by the company looks off in the timeseries. However, the total debt issued is representative of liabilities outstanding.
The following timeline details the earliest maturity, call, or put date of DAT-issued debt looking forward from January 2026. Most of the DAT debt is due, at the earliest, between September 2027 and September 2028.
The following details the effective quarterly interest due on DAT-issued debt. Strategy saw a meaningful increase QoQ in its quarterly interest. This is due to new STRC issuance. Note that STRC dividends are payable only when declared by the board out of legally available funds, though any unpaid dividends accumulate and must be satisfied before distributions to junior securities. As a result, STRC dividend payments may be made unevenly and at non-fixed intervals.
Total crypto-related debt outstanding, including the debt taken on by DATs, declined 3.77% quarter-over-quarter. After reaching an all-time high in Q3 2025, total outstanding debt through onchain and offchain channels ended Q1 at $85.1 billion and saw its second consecutive quarter of decline.
Futures Market
Futures open interest (OI), including perpetual futures (perps), declined 12.83% QoQ from $119.52 billion to $104.19 billion. Despite the decline, futures open interest has begun to rebound off the low reached in late February, and since then has climbed $24.04 billion or 26.62%.
It’s important to note that the entirety of the futures open interest figure does not constitute an absolute amount of leverage. This is due to the fact that some portion of the open interest figure can be offset by long spot positions, giving traders delta-neutral exposure to the underlying asset, and the total leverage ratio of the market is not directly observable from open interest alone.
CME’s share of open interest, including perps and non-perps, stood at 10.71% on March 31, down 231 basis points QoQ. Between the end of the quarter and May 1, CME’s share has increased marginally to 11.01% and is still down by almost half from its high of 21.22% in December 2024.
Hyperliquid and DeFi market dominance declined by 125 bps and 65 bps, respectively, over the quarter. As of March 31, Hyperliquid commanded a 5.03% market dominance and DeFi as a category held 8.95%.
Conclusion
Two nine-figure exploits, negative price action, and capital flight defined the first quarter for onchain lending. More than $575 million was stolen in the Drift and LayerZero/KelpDAO hacks, and the latter triggered a mass exodus from Aave and numerous other applications. On the CeFi side, loan books showed their first signs of shrinkage but held above Q3 2025 levels despite BTC, ETH, and SOL falling 34%, 48%, and 59% respectively. This resilience reflects improved collateral standards and more disciplined practices among this cohort of lenders. The gradual deleveraging underway is consistent with a healthier market rather than a systemic breakdown.
Looking ahead, the industry's track record of self-regulation following major shock can give reason for cautious optimism, though meaningful risk management reforms will take time, and some participants may resist them entirely. If history is a guide, these events could ultimately leave DeFi, and the industry broadly, more resilient. However, the path to get there will be uneven.
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