Comprehensive report on decentralized lending in 2025

About Decentralized Lending

Decentralized lending is one of the historical and structural pillars of on-chain finance. Since 2020, with the rise of protocols like Compound and Aave, it has allowed millions of users to access open, transparent, and decentralized lending and borrowing products-without any banking intermediaries.

In its simplest form, lending involves depositing assets as collateral to borrow liquidity, or lending funds to earn yield. This model relies on overcollateralization, which ensures the system’s solvency. Over time, the model has diversified with the emergence of new architectures and more sophisticated products.

With over $120 billion in total value locked (TVL) across the DeFi sector, lending today represents a central infrastructure for the crypto ecosystem. It powers a wide range of use cases: asset-backed borrowing, arbitrage, leveraged trading, delta-neutral positions, yield farming, liquidation strategies, stablecoin minting, derivatives, and more.

In 2025, several key trends are shaping the lending space:

• The return of a bull market in 2024 has led to rising demand for leverage and yield strategies.
• The uncertain macroeconomic climate in early 2025 is pushing users to optimize capital use via safer, less volatile strategies.
• The ecosystem is increasingly fragmented: while Ethereum remains the dominant blockchain, many new networks and protocols are complicating access to opportunities.

This report aims to provide a detailed overview of the decentralized lending sector, highlighting dominant models, key metrics, recent developments, and emerging solutions.

Note: Soul Protocol commissioned this report from OAK Research. We will present our sponsor’s solution later in this report. You can also read our full breakdown of Soul Protocol here:

---

Overview of the Decentralized Lending Sector

Pool-Based Lending

The historical and still-dominant lending model in DeFi relies on overcollateralized, pooled liquidity. Users freely deposit assets into smart contracts, which serve as reserves for borrowers seeking on-chain credit.

This is a fully permissionless and automated process, with no human intermediaries. Unlike traditional finance, no individual credit scoring is involved-collateral provides the guarantee. All loans are overcollateralized, and liquidations are triggered automatically when positions become undersecured.

Interest rates in this model are dynamic, determined algorithmically based on pool utilization. The higher the borrowing demand relative to available liquidity, the higher the interest rate.

General mechanism:

• A user deposits an asset (e.g. USDC) into a lending pool managed by a smart contract to earn yield.
• Another user deposits collateral (e.g. ETH) and borrows a certain amount of USDC.
• The borrowing rate is adjusted dynamically based on market conditions. If the collateral value drops below a certain threshold (LTV max), the position is automatically liquidated to ensure the lender recovers their full deposit.

This model uses key parameters, including Loan-to-Value (LTV), which defines the maximum borrowing ratio per asset, the Health Factor, which indicates the position’s risk level, and the Liquidation Threshold & Penalty, which determine liquidation conditions.

Representative protocols:

• Aave - A multichain protocol structured around thematic pools, with stable/variable rate management and a modular V3 offering extended risk management tools. Currently the market leader.
• Compound - A pioneer launched in 2018, now focused on a USDC-only model (v3) with conservative mechanisms.
• Kamino - Solana’s flagship lending protocol, offering different vaults based on user strategies.
• Radiant Capital - A cross-chain protocol built on LayerZero, popular on Arbitrum.
• Venus - The main Compound fork on BNB Chain, with a stronger focus on altcoins.

This model offers simplicity, transparency, and robustness. However, it has limitations: mandatory overcollateralization, low capital efficiency, unattractive yields at times, and fragmented opportunities across protocols and chains.

Pool-based lending remains dominant, with Aave holding over $25 billion in TVL-almost half the sector’s total-and two-thirds of total borrowed value, showing high utilization and model effectiveness. However, the accumulation of bad debt remains a structural risk that initiatives like Aave Umbrella aim to address.

Peer-to-Peer Lending and Matching Engines

A new approach to lending has emerged as a layer on top of traditional pool-based models: peer-to-peer (P2P) lending or optimized matching. The goal is to better align lenders’ and borrowers’ interests by matching their positions directly.

Unlike lending pools where users interact with a collective liquidity reserve, these models aim to allocate capital more granularly, through isolated modules, vaults, or custom-built positions.

Moreover, improved blockchain performance is enabling a comeback of the order book model, this time applied to lending. In other words, interest rates are freely set by borrowers and lenders, managed via an order book format.

General mechanism:

• Each borrower opens a position with customized parameters: interest rate, collateral type, and borrowed asset.
• Lenders are then automatically “matched” to these open positions, often with more attractive rates than traditional pools.
• Everything is automated through smart contracts, but operates more like a marketplace than a shared liquidity pool.

Representative protocols:

• Morpho Blue - A modular architecture where each market (collateral and borrowed asset) is isolated and managed independently. Liquidations, interest rates, and parameters are defined per market.
• Morpho Optimizers - The original version of Morpho, functioning as an optimization layer on top of Aave or Compound, directly matching users when possible to provide better rates.
• Loopscale - Offers an automated order book for lending, with vaults available for passive lenders.
• Avon - Builds an architecture of curated vaults combined with an order-book model, focusing on optimized risk management.

Permissioned and Undercollateralized Lending

Contrary to the dominant overcollateralized model in DeFi, another category of protocols explores a more flexible (but also riskier) approach: undercollateralized lending, often deployed in permissioned environments.

In these models, lending is no longer solely backed by deposited collateral but incorporates elements like credit assessment, on-chain reputation, and even off-chain relationships between counterparties.

This logic is closer to traditional finance standards but requires reintroducing a degree of trust (or credit analysis) into an ecosystem historically built on trustless principles. As such, it’s typically aimed at “institutional” actors.

Main characteristics:

• KYC / whitelist - Access to these markets is usually restricted to verified entities (institutions, market makers, funds) pre-approved by protocol governance or a central coordinator.
• Undercollateralized or uncollateralized credit - Loans can exceed the value of posted collateral or, in some cases, be granted without any collateral.
• Off-chain risk management - Risk is not handled solely through automatic liquidation, but instead through careful borrower selection and the ability to pursue legal action if needed.

Representative protocols:

• Centrifuge / Clearpool - Similar models with identified borrowers, KYC whitelists, and a structure resembling bond markets.
• Goldfinch - Targets uncollateralized lending for borrowers in emerging markets, combining social and economic guarantees.
• TrueFi (legacy version) - Previously offered uncollateralized loans to institutions through a community-led due diligence process.
• Wildcat Finance - Offers a credit marketplace for verified entities (market makers, funds, institutions), with uncollateralized borrowing backed by legal off-chain agreements. This model offers higher yields but relies on external trust, which is often hard to reconcile with standard DeFi principles.

Collateral-backed Stablecoins (CDPs)

Another widely used lending mechanism in the DeFi ecosystem is based on Collateralized Debt Positions (CDPs), where a synthetic asset is minted against a user’s deposited collateral. The first protocol to implement this model was MakerDAO in 2017 with the DAI stablecoin.

This model resembles traditional lending because it allows users to generate liquidity from their assets without having to sell them. However, there is a key difference: instead of borrowing an existing asset from other users, the borrower mints a synthetic stablecoin by taking on debt against their own collateral.

It is still an overcollateralized loan, but with no counterparty, as the protocol itself issues the stablecoin based on predefined risk parameters for each collateral type.

Simplified mechanism:

• The user deposits an asset (e.g., ETH, stETH) into a smart contract.
• They mint a native stablecoin (e.g., DAI, GHO, USDS) up to a certain collateralization ratio (typically 150-200%).
• If the collateral value drops below the safety threshold, a liquidation is triggered automatically.
• When the user repays the debt (in stablecoins), their collateral is released.

Representative protocols:

• MakerDAO - Pioneer of the model with the DAI stablecoin, backed by a wide variety of collateral types (ETH, LSTs, RWAs, etc.). Features active DAO governance and a well-developed monetary stability system.
• Aave GHO - Aave’s native stablecoin, minted from liquidity in existing pools. Its interest rate is governed and relies on the same risk parameters as Aave markets.
• Sky USDS - A stablecoin minted via the Sky protocol, with its own risk parameters. Works similarly to a CDP but in a more restricted environment.
• Level USD - An overcollateralized stablecoin issued by the Level protocol, designed as a core component of a modular DeFi infrastructure. It includes automated vaults that optimize capital allocation between lending and yield strategies.
• ResolvUSD - A stablecoin issued by the Resolv protocol, backed by liquid staking assets like stETH or frxETH. Resolv uses a CDP model with a minimum 150% collateralization threshold.

This type of lending has become central to DeFi because it offers a powerful combination of capital efficiency (low-cost minting), stability (stable asset backed by strong collateral), and utility (CDP-issued stablecoins are widely used across protocols as a payment method, in liquidity pools, or as collateral themselves).

On-chain Derivatives

Beyond traditional lending protocols, other forms of credit exist in DeFi. These are indirect but just as essential: derivative products, which provide access to leverage. In this case, the loan is implicit, which means that no asset is withdrawn from a reserve and given to the user, but it follows a similar logic: depositing collateral to take a leveraged position on an asset.

This type of specialized credit is now a pillar of on-chain trading, experiencing rapid growth thanks to the popularity of perpetual DEXs. These Perps DEXs allow users to trade with leverage and no expiration date by depositing collateral on a DeFi platform. Two main models currently coexist:

• Order book model (e.g., Hyperliquid, dYdX v4, Aevo): Orders are executed via an order book (either off-chain or on-chain), matching longs and shorts. Liquidity is often provided by market makers or a specific vault (like HLP on Hyperliquid).
• Liquidity pool model (e.g., GMX, Level Finance, Vertex): Traders interact directly with a shared liquidity pool. Each trade’s counterparty is the LPs (liquidity providers), who earn fees and the net losses from traders.

New protocols aim to merge leverage, yield, and stability into innovative architectures. One notable example is Ethena, which transforms a delta-neutral strategy into a synthetic stablecoin (USDe) by combining a long spot position with a short Perps position and harvesting the funding rate as yield.

Modular and Cross-Protocol Lending

The growing fragmentation of liquidity across blockchains, protocols, and assets has given rise to a new category of solutions: those aiming to unify or route access to credit through a cross-protocol and cross-chain abstraction layer.

These architectures seek to make lending more seamless, interoperable, and composable by interfacing with multiple underlying liquidity sources (Aave, Compound, Morpho, etc.), while offering users a unified experience.

Main features:

• Smart routing between various lending protocols to find the best rates or collateralization terms.
• Cross-chain and cross-layer interoperability, with unified collateral management across multiple ecosystems (Ethereum, L2s, Solana, etc.).
• Specialized modules, such as integrated bridges, position managers, or unified risk dashboards.

Representative examples:

• Euler - A modular lending platform that enables users to lend and borrow via a permissionless vault system.
• Instadapp Avocado - A multi-protocol abstraction layer that allows users to manage Aave, Compound, and Morpho positions from a single smart wallet.
• Socket / Connext - Interoperability frameworks that let users move assets or interact with multiple execution layers from one interface.
• Shell v3 - Offers a fully composable architecture where each DeFi function (mint, lend, swap…) is an interoperable module.

In this evolving landscape, Soul Protocol positions itself as a modular and interoperable lending infrastructure, designed to aggregate, route, and standardize access to on-chain credit-regardless of the underlying blockchain or protocol.

Soul aims to tackle the three major challenges currently facing decentralized lending: liquidity fragmentation across chains and protocols, heterogeneous risk parameters, which make analysis and position management difficult, and lack of interoperability in lending positions.

---

On-chain metrics

In 2025, decentralized lending remains the cornerstone of on-chain finance. Total Value Locked (TVL) has reached over $56 billion at the time of writing this report, representing a 14.5% increase since the beginning of the year.

Note: this figure is particularly significant considering the unfavorable market conditions. ETH, the main collateral in lending, has dropped 22% over the same period.

More importantly, the broader trend is clearly positive when observed over a longer time frame. Compared to the same period in 2024 (YoY), the total lending TVL has grown from approximately $31 billion to $56 billion, an increase of nearly 85%.

The following section provides a detailed breakdown of the lending market by blockchain, by protocol, and by asset.

By blockchain

Historically, decentralized finance emerged and developed on Ethereum. Despite the arrival of many competing blockchains, Ethereum has remained the main infrastructure layer for on-chain finance and especially for lending markets.

At the time of writing, lending TVL on Ethereum amounts to $33.7 billion, or 60% of the market share. This dominance has gradually declined over recent years, notably in favor of Tron (driven by JustLend), Solana (supported by Kamino and Marginfi), and BNB Chain (led by Venus).

In recent months, market share has continued to decline with the emergence of new competing ecosystems: Sui, Aptos, and more recently Sonic. While these are better suited for DeFi applications requiring high performance, they have also succeeded in building real lending markets.

The most notable example is Sonic, whose lending TVL grew from a few million dollars to over $750 million in 2025, following the deployment of Aave V3.

Additionally, we also observe the growing influence of EVM-compatible networks, particularly layer 2s that belong directly to the Ethereum ecosystem. In particular, Base has seen significant growth, reaching $1.7 billion in TVL, representing a +950% YoY increase and +68% growth in 2025.

In short, the lending landscape is becoming increasingly complex and fragmented. While Ethereum remains the backbone of the sector, mainly due to its high level of security required for such use cases, activity is shifting toward newer, faster, and cheaper networks, or those offering more attractive incentives.

By protocol

Just as Ethereum is the historical backbone of DeFi, Aave is the leading actor in the lending sector. Aave maintains a dominant position with nearly 62% of the total lending sector TVL, amounting to $25.6 billion at the time of writing. This represents a 25% growth in 2025 and 96% YoY.

Despite the rise of many competitors, Aave has retained a central role thanks to its presence on several EVM-compatible networks, especially those mentioned above: Base, Arbitrum, Sonic, etc. More importantly, it has outpaced its historical competition:

• Compound, once Aave's direct competitor, has a TVL of $2.7 billion, far below its 2021 peak of $12 billion.
• Benqi Finance, active mainly on Avalanche, shows a TVL of $333 million, down 26% in 2025 and well below its 2022 peak of $1.7 billion.
• MakerDAO, once a pillar of the sector, is experiencing a clear decline with a TVL of $5.2 billion, down 25% in 2025 and far from its peak in 2021 ($20 billion).

Among other notable protocols, Morpho stands out as the biggest winner in recent months, with a 81% YoY growth and 14% growth in 2025, reaching a TVL of $3.6 billion. The protocol, developed by Morpho Labs, benefits from the growing adoption of its “Morpho Blue” architecture, which appeals to users seeking more competitive rates and greater flexibility in risk parameter management.

Likewise, Fluid is gaining traction with a unique value proposition: a new standard for merging a DEX with a lending protocol. Fluid Lending's TVL is around $930 million, up 28% in 2025 and 225% YoY.

Finally, Maple has emerged this year as the leading on-chain asset manager, opening access to the on-chain credit market for institutional actors while allowing traditional DeFi participants to engage as well. Maple’s TVL stands at $1.16 billion, representing a 332% increase in 2025 and 2100% YoY growth.

In the end, the market remains highly concentrated: the five largest protocols (Aave, Morpho, Compound, Kamino, JustLend) capture nearly 80% of the sector’s aggregated TVL. This dominance reflects a consolidation around robust and interoperable architectures, while niche or mono-chain lending protocols struggle to maintain attractiveness in an increasingly fragmented market.

By asset

Currently, Ethereum dominates the lending sector with 81% market share, while Aave V3 is the leading market dedicated to this activity. As such, we decided to focus on data related to these two players to present a profile of the most commonly used assets in borrowing and collateral.

In terms of main assets used as collateral, we mainly find Wrapped BTC (WBTC, cbBTC, and tBTC): 4.3 billion dollars, or 31.9%. This finding is particularly interesting, as it shows that a significant portion of BTC in circulation is migrating to Ethereum to be used in yield-generating strategies.

Ether remains the most used asset with 62.3% of the total, or 8.4 billion dollars: 23% in ETH, 21.5% in Liquid Restaking tokens (rETH, ETHx, eETH), and 17.8% in liquid staking tokens (cbETH, stETH, etc.).

On the borrowing side, stablecoins (USDT, USDC, GHO, USDS, and DAI) represent nearly half of the assets used with 4.3 billion dollars, or 48.5%. They are mainly used for leverage strategies or yield farming on other protocols.

Ether represents the second-largest share: 3.6 billion dollars in ETH and 593 million dollars in liquid staking tokens, or 47.3% of the total.

---

Soul Protocol: a meta-layer to unify cross-chain lending

The previous sections of this report have made it clear: lending markets are becoming increasingly fragmented, scattered across multiple blockchains and protocols. In this context, Soul proposes a radically new approach: that of a unified lending market, capable of aggregating all available liquidity and enabling seamless access to on-chain credit across all layers of the ecosystem.

Unlike traditional protocols, Soul does not operate its own lending and borrowing market. Instead, it acts as an orchestration layer that connects all existing markets, allowing users to access them through a single unified interface.

With over $44 billion deposited in lending protocols in 2025, the market presents massive unification potential. Today, this liquidity is siloed, spread across dozens of non-interoperable markets. Soul’s proposition is to capture a share of this fragmented liquidity by acting as a unifier, facilitating the movement of capital from one market to another, while simplifying the user experience.

Soul’s infrastructure is designed to be interoperable (both cross-chain and cross-protocol) and compatible with existing solutions. It is already integrated with major protocols (Aave, Compound, Nexus, etc.) and leading blockchains (Ethereum, Base, Arbitrum, Avalanche, etc.), and is expected to expand to more markets in the coming months.

Moreover, Soul’s approach creates a win-win dynamic. While it leverages existing markets, by addressing a real need, Soul also attracts more liquidity and generates additional volume, which directly benefits the underlying protocols.

In short, Soul is not trying to compete with today’s lending giants, but to interconnect them. It is this positioning as a credit “meta-layer” that gives it a unique opportunity: to turn a fragmented sector into a fluid, efficient, and truly global market.

Want to discover Soul Protocol and interact with the testnet to earn Seeds (points for the upcoming SO token airdrop)? Then use our referral link, thank you for supporting us!

---

Conclusion

Decentralized lending remains one of the most solid pillars of DeFi. After several years of structuring around simple and robust models like Aave or Compound, the sector is now entering a new phase of innovation, driven by more flexible, modular approaches better suited to the diversity of user needs.

This evolution is reflected in the emergence of new models: peer-to-peer lending, permissioned markets, collateral-backed stablecoins, derivatives, and even cross-chain protocols. While historical players still hold a dominant position, competition is intensifying, pushing the ecosystem toward greater efficiency, transparency, and composability.

In this context, Soul Protocol stands out with an original approach: rather than building another lending protocol, it connects existing components to deliver a unified experience. A pragmatic response to the current fragmentation that could open the way to a new generation of use cases and users.