Crypto-Backed Lending Drops 17% in Q2 as CeFi Surpasses DeFi for First Time Since 2023

The crypto-backed lending market contracted to $56.16 billion in the second quarter, a 16.78% decline from the previous quarter, according to data from Galaxy Research. This marks a continued deleveraging trend, with the figure now 40.13% below the $78.69 billion peak recorded in the third quarter of 2025.

DeFi and CeFi Divergence

Decentralized finance (DeFi) lending experienced a sharper contraction, falling 27.61% quarter-over-quarter to $20.43 billion. In contrast, centralized finance (CeFi) lending declined by a more moderate 9.62% to $22.98 billion. This shift pushed CeFi lending ahead of DeFi for the first time since the third quarter of 2023, signaling a notable change in market preference.

The report highlights that the current deleveraging process has been relatively orderly compared to past downturns. The recent quarterly declines of 10%, 5%, and 17% are considered moderate, especially when juxtaposed with the dramatic drop of more than 55% in a single quarter during 2022.

Market Context and Implications

The data suggests that borrowers and lenders are exercising more caution, possibly due to macroeconomic uncertainties and tighter risk management practices. The fact that CeFi lending has regained dominance could indicate that institutional players are favoring platforms with clearer regulatory frameworks and custodial assurances, even as DeFi continues to innovate.

Why It Matters

For market participants, the decline in lending volumes signals reduced leverage in the crypto ecosystem, which may lower systemic risk but also dampen liquidity. The shift toward CeFi could influence where new capital flows and how protocols adapt. For observers, the orderly deleveraging is a positive sign of market maturity, but the persistent decline warrants attention to underlying demand drivers.

Conclusion

The second-quarter figures from Galaxy Research underscore a market in recalibration, with lending activity cooling from its 2025 peak. The relative stability of CeFi compared to DeFi suggests a cautious but not panicked market, and the orderly nature of the decline offers some reassurance. As the third quarter unfolds, stakeholders will watch whether this trend stabilizes or accelerates.

FAQs

Q1: What is crypto-backed lending?
Crypto-backed lending involves borrowing fiat or stablecoins by pledging cryptocurrency as collateral. It can occur on centralized platforms (CeFi) or through decentralized protocols (DeFi).

Q2: Why did DeFi lending decline more than CeFi?
The report does not specify a single cause, but factors may include higher risk perception in unregulated protocols, smart contract vulnerabilities, and a shift toward platforms with stronger compliance measures.

Q3: How does this compare to previous market downturns?
The current deleveraging is considered orderly, with quarterly declines of 10%, 5%, and 17%—far less severe than the 55%+ single-quarter drop in 2022, indicating a more mature and resilient market.