Crypto leverage surges to a new high in Q3 amid expanding DeFi markets

Galaxy Research found that on-chain lending led to crypto-collateralized debt hitting a record $73.6 billion in the third quarter. The surge marked an all-time high in crypto-collateralized borrowing, but the market’s leverage is now better collateralized than during the 2021-2022 cycle.

The analytics firm revealed that the surge was mainly driven by on-chain lending, which now accounts for about 66.9% of all crypto-collateralized debt. On-chain borrowing has surged from 48.6% at the previous peak four years ago, driven by collateralized debt positions (CDPs), stablecoins such as DAI, and lending applications.

Borrowers abandon uncollateralized lending and shift to full-collateral models

Data from Galaxy Research also showed that DeFi lending alone increased by 55% to an all-time high of $41 billion. According to the analytics firm, the surge was supported by points-driven user incentives and improved collateral types such as Pendle Principal Tokens.

Centralized lending also grew by 37% to $24.4 billion. However, the centralized lending market remains a third smaller than its 2022 peak.

The researchers noted that borrowers from the last cycle have largely abandoned uncollateralized lending and shifted toward full-collateral models. Galaxy Research believes lenders are moving towards collateralized models as they seek institutional capital or public listings.

On-chan data revealed that Tether remains the dominant CeFi lender, holding nearly 60% of tracked loans. The USDT issuer also recorded its best quarter ever in terms of absolute loan book growth, expanding its book by almost $630 million.

DeFi also saw a decisive shift in the third quarter, with lending apps now capturing more than 80% of the on-chain market. CDP-backed stablecoins shrank to 16% during the same period. 

Galaxy Research noted that new chain deployments, including Aave and Fluid on Plasma, helped fuel the activity. The firm found that Plasma attracted more than $3 billion in borrowings within five weeks of launch.

On-chain data also showed that a leverage-induced wipeout occurred shortly after the end of Q3, resulting in the liquidation of more than $19 billion worth of perp positions. The October 10 wipeout was the largest single-day drop in crypto futures history. 

Hyperliquid recorded the most liquidations, totaling $10.08 billion over the 24 hours. Bybit and Binance also reported $4.58 billion and $2.31 billion, respectively.

However, Galaxy’s report still claims the liquidation event showed no signs of broader credit deterioration. The firm argued that most positions were mechanically de-risked as exchanges’ auto-deleveraging systems kicked in.

Corporate DAT strategies continue to rely on leverage

The report also revealed that corporate digital-asset treasury (DAT) strategies continue to rely on leverage. Galaxy Research said it’s tracking more than $12 billion in outstanding debt tied to crypto-acquiring firms. 

On-chain data showed that total industry debt, including DAT issuance, hit a record $86.3 billion. Galaxy’s report revealed that the debt outstanding has remained stagnant through most of the year, with just $422 million added in the previous quarter.

Galaxy also noted a 41.46% QoQ surge in futures Open Interest (OI), including perpetual futures, from $132.75 billion to $187.79 billion on September 30. Futures OI reached an all-time high of $220.37 billion on October 6. The drop in perps on October 10 also saw OI plummet 30% overnight from $207.62 billion the previous day to $146.06 billion by the end of the wipeout day.

Galaxy Research stated that it tracked $24.37 billion of open CeFi borrows as of September 30. The firm also noted that CeFi borrowing has surged by $6.6 billion, or 37.11%, quarter-over-quarter, and $17.19 billion (+239.4%) since the bear market of $7.18 billion in Q4 2023.

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