DeFi lending TVL is outpacing DEXs due to more sustainable yield — VC

Decentralized finance (DeFi) lending is experiencing a surge in popularity, surpassing decentralized exchanges (DEXs) in total value locked (TVL). Currently, DeFi lending protocols control $53.6 billion, or 43%, of the total $124.6 billion locked across all DeFi protocols, exceeding even liquid staking. Aave, a multichain lending protocol, leads the pack with $25 billion in locked value, almost half the DeFi lending market.

This growth contrasts sharply with the decline in DEX TVL. Once dominant, DEXs have seen their TVL plummet from $85.3 billion in November 2021 to $21.5 billion today. Henrik Andersson of Apollo Capital attributes this shift to the sustainability of lending yields compared to the impermanent loss often incurred in DEX liquidity pooling. He suggests Uniswap v3’s increased capital efficiency and the rise of intent-based swaps, which utilize centralized exchange liquidity, have further contributed to the DEX TVL decline.

DeFi lending protocols like Aave and Compound offer users interest on deposited assets or the ability to borrow against collateral. Smart contracts ensure secure, trustless transactions. While DEX pools might offer higher, albeit less stable, rewards, DeFi lending provides a more sustainable yield; Aave, for example, offers annual percentage yields (APY) of 1.86% for ETH and 3.17% for USDT.

The DeFi lending market’s resilience is further highlighted by its dominance over centralized finance (CeFi) counterparts. By the end of 2024, DeFi lending accounted for approximately 65% of the total market share, consistently outperforming CeFi since Q4 2022, according to a Galaxy Digital report. This dominance emerged after the collapse of several CeFi lenders (Genesis, Celsius, BlockFi, Voyager), which caused a significant market contraction. However, DeFi protocols led the recovery, experiencing a near 960% increase in open borrows between Q4 2022 and Q4 2024. This recovery underscores the strength of DeFi’s algorithmic, overcollateralized models. Galaxy Digital anticipates increased institutional participation and clearer regulations will further fuel DeFi lending adoption.