The Structure, Risks, and New Cycle of the On-Chain Lending Market

Author: CoinW Research Institute

Key points

On-chain lending is gradually transforming from an early leverage-centric tool to a fundamental infrastructure for capital allocation. On-chain lending has become an important part of the DeFi ecosystem. Currently, the total value of on-chain lending protocols (TVL) is approximately $64.3 billion, accounting for about 53.54% of the total TVL of DeFi.

Aave has become the leading protocol in the on-chain lending sector, with a TVL of approximately $32.9 billion, accounting for about 50% of the total TVL of the lending sector. Meanwhile, Morpho and others continue to consolidate their market share, resulting in a dominant player and several strong contenders in the on-chain lending sector.

Credit assets have become an important part of on-chain RWA. With more types of debt being introduced onto the chain, and institutions' increasing demand for compliant and traceable collateral, RWA lending is expected to become another significant growth engine. Simultaneously, improvements in the macro-monetary environment and regulatory framework are jointly reducing capital flow and compliance costs, creating smoother external conditions for market development.

On-chain lending protocols also face multiple risks. First, they are highly dependent on collateral value and market liquidity, making them susceptible to liquidation due to market fluctuations. Second, the introduction of uncollateralized lending and RWA increases credit default and counterparty risk. Furthermore, over-reliance on token incentives to artificially inflate scale, and the security risks of bridging in cross-chain expansion, all pose significant challenges. Therefore, on-chain lending protocols must balance security, liquidity, and compliance while pursuing growth.

As securities tokenization and compliant assets such as US Treasury bonds gradually move onto the blockchain, on-chain lending is evolving from a crypto-native financing tool into mainstream financial infrastructure, with a more robust collateral base. In this process, inter-institutional on-chain lending is expected to become a significant growth driver. Simultaneously, the coexistence of fixed and floating interest rates will promote the continuous maturation of the on-chain interest rate system. Regulatory and capital logic may also lead to a market differentiation into a structure where a compliant and stable layer coexists with a high-risk, innovative layer. On-chain lending will accelerate its integration into global capital markets through asset compliance and institutional alignment.

Table of contents

I. Overview of the On-Chain Lending Market

• 1.1. Market Size and Capital Flows
• 1.2. Macroeconomic and Industry Drivers
• 1.3. Regulatory Dynamics and Compliance

II. Classification of On-Chain Lending Markets

• 2.1. Mortgage-backed loan agreement
• 2.2. Unsecured Loan Agreement
• 2.3. Modular Lending Agreement
• 2.4. RWA Combined with Lending

III. Competitive Landscape

• 3.1. Head-end Protocol Landscape and TVL Changes
• 3.2. Comparison of Revenue Structure and Profit Model
• 3.3. User Profile and Asset Structure
• 3.4. Multi-chain deployment and ecosystem integration

IV. Risk Dilemmas and Challenges

• 4.1. Liquidity Risk
• 4.2. Credit Default Risk
• 4.3. The Illusion of Incentives and Growth
• 4.4. Cross-chain risks

V. Possible Development Trends

• 5.1. On-chaining of inter-institutional lending
• 5.2. On-chaining of securities and their collateral potential
• 5.3. U.S. Treasury bonds will become the core asset for lending.
• 5.4. Coexistence of fixed and floating interest rates
• 5.5. The Two-Tier Structure Differentiation in the Lending Market

VI. Conclusion

References

On-chain lending protocols have become a crucial part of the DeFi ecosystem. From their initial role as leverage tools, they have expanded to encompass diversified capital markets including stablecoins and RWA. On-chain lending protocols not only reliably support liquidity but are also increasingly becoming key centers for pricing funds and allocating capital. Currently, the total value of on-chain lending protocols (TVL) is approximately $64.3 billion, accounting for about 53.54% of the total TVL of DeFi (nearly $120.2 billion). Specifically, Aave alone accounts for about 50% of the lending TVL, approximately $32.9 billion; Morpho and others also hold significant market share.

Furthermore, the diversity of funding sources and asset classes in on-chain lending is increasing, with RWA becoming a new engine for the growth of lending protocols. The on-chain lending market structure faces both growth and challenges. On the one hand, the TVL (Total Value Limit) of lending protocols has gradually recovered, and the overall market trend shows signs of recovery. On the other hand, the market still faces structural challenges, with severe liquidity fragmentation, dispersed funds between protocols and chains, and a lack of efficient liquidity integration mechanisms; traditional stablecoin lending is approaching saturation, while RWA and institutional credit remain insufficient in supply, leading to interest rate divergence and differences in risk appetite. The following report will systematically analyze the operating logic, current development status, and trends of the on-chain lending sector from the perspectives of market overview, market classification, and competitor landscape.

Please see the full report here: https://www.coinw.com/zh_CN/research/on-chain-lending-market-structure-risks-and-the-new-cycle/106