Leverage Reconfigures in Q1: DeFi Recovers, CeFi Quietly Expands, Treasury Debt Mounts
The crypto lending landscape is undergoing a transformation, not a collapse. Galaxy Research’s Q1 2025 report reveals a 4.9% quarter-over-quarter decrease in total crypto-collateralized lending, reaching $39.07 billion—the first decline since late 2023. However, this contraction masks a shift in leverage, not its disappearance.
Initially, decentralized finance (DeFi) lending experienced a significant downturn, falling as much as 21% early in the quarter. This dip was short-lived, with a strong rebound in April and May fueled by Aave’s integration of Pendle tokens. These tokens, with their yield-bearing structure and high loan-to-value ratios (up to 90%), stimulated a surge in borrowing. By late May, DeFi borrowing had climbed over 30% from its low point, with Ethereum leading the recovery.
Conversely, centralized finance (CeFi) lending saw growth, increasing by 9.24% to $13.51 billion, driven primarily by Tether, Ledn, and Two Prime. However, the report highlights limited public disclosure, suggesting that the actual CeFi lending volume is likely much higher, potentially exceeding the reported figures by 50% or more, due to the contributions of private desks, OTC platforms, and offshore lenders.
A new leverage source is emerging: Bitcoin treasury companies. Firms like MicroStrategy (MSTR) have utilized billions in convertible debt to amass BTC holdings. As of May, outstanding debt across these companies totaled $12.7 billion, with significant maturity dates between 2027 and 2028.
In the derivatives market, increasing open interest on CME’s ether (ETH) futures contracts indicates rising institutional involvement. Simultaneously, Hyperliquid’s expanding share of the perpetual futures market underscores the persistent influence of retail leverage.
The report emphasizes the interconnectedness of the crypto market, where distress in one area can swiftly impact the entire ecosystem. While leverage may be more dispersed in this cycle, its potential impact remains substantial. The evolving nature of leverage necessitates a comprehensive understanding of the multifaceted landscape, encompassing DeFi, CeFi, treasury firms, and derivatives markets.
