The cryptocurrency market continues to evolve at a rapid pace, and leverage remains a critical component of its ecosystem. Galaxy Research’s Q1 2025 report, The State of Crypto Leverage, provides a comprehensive analysis of the shifting dynamics in crypto-collateralized lending, decentralized finance (DeFi), centralized finance (CeFi), treasury strategies, and futures markets.
The report highlights a market undergoing transformation, with new platforms, institutional participation, and evolving risks shaping the future of crypto leverage.
Despite a contraction in overall lending, the interplay between CeFi and DeFi, alongside innovative treasury strategies, signals a maturing and increasingly interconnected crypto economy.
In Q1 2025, the crypto-collateralized lending market experienced a 4.88% decline, totaling $39.07 billion in open borrows.
This marked the first quarter-on-quarter (QoQ) contraction since Q3 2023, driven primarily by a significant $4.7 billion (-21.14%) drop in DeFi lending.
In contrast, CeFi venues saw a $1.14 billion (+9.24%) increase in borrowing, with platforms like LEDN climbing to second place among lenders, followed by contributors like Two Prime, Galaxy, and Coinbase.
Stablecoin borrowing also grew, with the crypto-collateralized component rising by $1.6 billion (+25.56%).
Stablecoin borrow rates, however, fell sharply by 57%, reflecting reduced demand in DeFi lending environments.
These shifts underscore a redistribution of leverage, with CeFi gaining ground as DeFi faces challenges.
DeFi lending, despite its decline, showed signs of recovery by May, with borrowing growing over 30%, led by capital-efficient assets like Pendle on Aave.
Ethereum remains the dominant chain for DeFi lending, with Aave V3 on Ethereum L1 holding $23.6 billion in deposits as of March 31, 2025.
Wrapped Bitcoin tokens (WBTC, cbBTC, tBTC), ETH, and liquid (re)staking tokens are the most common collateral types.
The report notes a declining reliance on collateralized debt position (CDP) stablecoins, attributed to improved liquidity and parameters in lending applications and the rise of delta-neutral stablecoins like Ethena’s USDe.
These developments highlight DeFi’s adaptability, even amidst a broader market contraction.
CeFi lending, on the other hand, is benefiting from growing institutional interest.
The report points to platforms like CME and Hyperliquid gaining traction, with CME seeing increased institutional participation in futures markets.
Hyperliquid, a Layer 1 blockchain focused on on-chain financial applications, is emerging as a key player in decentralized perpetual futures trading.
This shift toward distributed leverage across new platforms introduces both opportunities and risks.
The interconnectedness of CeFi and DeFi markets means that stress in one venue could quickly ripple across the ecosystem, amplifying systemic risks.
A notable trend in Q1 2025 is the rise of Bitcoin treasury strategies, with corporate debt-backed Bitcoin holdings reaching $12.7 billion.
These strategies, holding $8.2 billion in debt for Bitcoin, introduce long-dated credit risk into the market.
Companies are leveraging Bitcoin as collateral to diversify portfolios, settle trades, or position strategically for long-term growth.
Galaxy Research predicts this trend will accelerate, driven by regulatory clarity and institutional adoption, particularly following the U.S. administration’s pro-crypto stance under President Trump’s second term.
Futures markets are also rebounding, with platforms like CME and Hyperliquid capturing significant activity.
The report suggests that leverage is not disappearing but transforming, becoming more fragmented across venues.
This fragmentation, while diversifying risk, also increases complexity, as interconnections between platforms could amplify volatility during market stress.
Galaxy Research’s report paints a picture of a crypto leverage landscape in flux.
While total lending contracted, the growth in CeFi borrowing, the rebound in DeFi, and the rise of treasury strategies signal a resilient market adapting to new realities.
Institutional interest, regulatory tailwinds, and innovative platforms like Hyperliquid are driving transformation, but they also introduce new risks.
As the crypto economy matures, stakeholders must navigate this nuanced landscape with caution, balancing opportunity with the potential for systemic challenges.