Galaxy Research found that on-chain lending led to crypto-collateralized debt hitting a record $73.6 billion in the third quarter. The surge marked an all-time high in crypto-collateralized borrowing, but the market’s leverage is now better collateralized than during the 2021-2022 cycle.
The analytics firm revealed that the surge was mainly driven by on-chain lending, which now accounts for about 66.9% of all crypto-collateralized debt. On-chain borrowing has surged from 48.6% at the previous peak four years ago, driven by collateralized debt positions (CDPs), stablecoins such as DAI, and lending applications.
Borrowers abandon uncollateralized lending and shift to full-collateral models
Data from Galaxy Research also showed that DeFi lending alone increased by 55% to an all-time high of $41 billion. According to the analytics firm, the surge was supported by points-driven user incentives and improved collateral types such as Pendle Principal Tokens.
Centralized lending also grew by 37% to $24.4 billion. However, the centralized lending market remains a third smaller than its 2022 peak.
The researchers noted that borrowers from the last cycle have largely abandoned uncollateralized lending and shifted toward full-collateral models. Galaxy Research believes lenders are moving towards collateralized models as they seek institutional capital or public listings.
On-chan data revealed that Tether remains the dominant CeFi lender, holding nearly 60% of tracked loans. The USDT issuer also recorded its best quarter ever in terms of absolute loan book growth, expanding its book by almost $630 million.
DeFi also saw a decisive shift in the third quarter, with lending apps now capturing more than 80% of the on-chain market. CDP-backed stablecoins shrank to 16% during the same period.
“This is a notable shift away from synthetic, crypto-backed stablecoins towards the lending out of centralized stablecoins like USDT and USDC.”
–Zack Pokorny, Research Associate at Galaxy Research.
Galaxy Research noted that new chain deployments, including Aave and Fluid on Plasma, helped fuel the activity. The firm found that Plasma attracted more than $3 billion in borrowings within five weeks of launch.
On-chain data also showed that a leverage-induced wipeout occurred shortly after the end of Q3, resulting in the liquidation of more than $19 billion worth of perp positions. The October 10 wipeout was the largest single-day drop in crypto futures history.
Hyperliquid recorded the most liquidations, totaling $10.08 billion over the 24 hours. Bybit and Binance also reported $4.58 billion and $2.31 billion, respectively.
However, Galaxy’s report still claims the liquidation event showed no signs of broader credit deterioration. The firm argued that most positions were mechanically de-risked as exchanges’ auto-deleveraging systems kicked in.
Corporate DAT strategies continue to rely on leverage
The report also revealed that corporate digital-asset treasury (DAT) strategies continue to rely on leverage. Galaxy Research said it’s tracking more than $12 billion in outstanding debt tied to crypto-acquiring firms.
On-chain data showed that total industry debt, including DAT issuance, hit a record $86.3 billion. Galaxy’s report revealed that the debt outstanding has remained stagnant through most of the year, with just $422 million added in the previous quarter.
Galaxy also noted a 41.46% QoQ surge in futures Open Interest (OI), including perpetual futures, from $132.75 billion to $187.79 billion on September 30. Futures OI reached an all-time high of $220.37 billion on October 6. The drop in perps on October 10 also saw OI plummet 30% overnight from $207.62 billion the previous day to $146.06 billion by the end of the wipeout day.
Galaxy Research stated that it tracked $24.37 billion of open CeFi borrows as of September 30. The firm also noted that CeFi borrowing has surged by $6.6 billion, or 37.11%, quarter-over-quarter, and $17.19 billion (+239.4%) since the bear market of $7.18 billion in Q4 2023.
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