Crypto Lending Isn't Broken. It Was Mispriced

Forbes contributors publish independent expert analyses and insights. Crypto lending is returning, but the shape of its recovery reflects an unresolved argument over how risk should be priced. The last cycle made one thing obvious. Risk was often hidden behind yield, and when markets turned, that structure did not hold, whether through centralized lenders like Celsius and BlockFi or DeFi protocols that failed under stress. What is less clear is what replaces it. "There is a major difference between opaque yield platforms and properly structured secured lending," said Himanshu Sahay, co-founder of Arch Lending. That is one reading of what went wrong. At one end of the market, lenders like Arch Lending are rebuilding around tighter controls. "A large part of the previous cycle was built on rehypothecation, commingled assets, and counterparty exposure that borrowers didn't always fully understand," Sahay said. "That model failed under stress." The response has been to narrow the product and reduce the number of moving parts. Borrowers post crypto collateral, assets are held in qualified custody, and loan terms are defined upfront, with less emphasis on maximizing yield and more on making the structure of the loan clear before it is taken. "The core advantage is preserving long-term exposure while accessing liquidity in the short term," Sahay said, describing a product aimed less at traders and more at long-term holders who want flexibility without exiting positions. That matters in a market where many investors remain in profit but are not actively looking to sell, making access to liquidity without triggering a taxable event or losing exposure particularly valuable in volatile conditions. But this approach rests on a specific assumption, that risk is best managed by reducing complexity. Not everyone rebuilding crypto lending starts from that premise. "The right question isn't whether the protocol is safe," said Pierre Person, CEO of Fira. "It's whether a specific market is safe." That framing leads in a different direction. Rather than simplifying lending into a single product, systems like Fira Money and Usual break it into smaller components, where each market is defined by its own collateral, loan-to-value ratios, and risk parameters, and users choose between them based on the returns and exposures they are willing to take. The assumption here is not that risk can be removed, but that it should be made visible and priced more precisely. This model has expanded alongside broader shifts in crypto markets. Stablecoin supply now exceeds $280 billion, reflecting continued growth in on-chain dollar demand and the rise of yield-bearing collateral. That creates the foundation for systems where lending is less about accessing leverage and more about allocating capital across different forms of risk. But it also shifts responsibility, as understanding the loan is no longer just the platform's role, but increasingly the user's. The difference between these approaches becomes clearer when looking at how they handle time. "Variable-rate lending is fundamentally a short-duration primitive dressed up as a lending market," Person said. In most DeFi systems, borrowing costs adjust continuously in response to utilization, which means conditions can change quickly, particularly in periods of stress when liquidity tightens and rates move sharply. Fira's approach is to fix that uncertainty at the start by locking rates at origination and holding them constant through the life of the loan. "Once a position is opened, the rate is locked from origination to maturity," he said. "The borrower pays exactly that rate, regardless of what happens to market liquidity or spot rates." In practice, that insulates borrowers from the rate shocks that emerge when utilization spikes, turning what would otherwise be a continuously repriced position into something closer to a fixed-income instrument. That creates predictability, but it does not remove risk so much as shift when and how that risk is taken. Lenders like Arch Lending address the same issue differently, focusing less on redesigning rate mechanics and more on reducing exposure through structure, with tightly managed collateral, clearly defined loan terms, and fewer variables left to change mid-position. These approaches do not fully overlap. One reduces the number of things that can change during a loan, while the other accepts that change is inevitable and tries to define it upfront. In practice, they are not always mutually exclusive, as different borrowers may prioritize different forms of certainty, whether around custody, structure, or rates, but neither eliminates the problem entirely. The data suggests the market is rebuilding, but not converging. On-chain lending has returned to scale, with protocols like Morpho and Aave supporting billions in active loans and deposits, with Aave alone surpassing $40 billion in net deposits while newer platforms continue to grow across chains. Total lending activity across major DeFi protocols has recovered meaningfully from post-2022 lows, even as the structure of that activity has shifted toward more transparent and risk-defined systems, according to recent industry research. The composition of that activity, however, has changed, with less emphasis on maximizing yield and more focus on how that yield is generated, shifting the core question from what the return is to what sits underneath it. That shift is visible across both centralized and on-chain systems, even if they approach it differently, and what is not yet clear is which approach holds up under stress. Centralized lenders remain dependent on custody frameworks and regulatory environments that can change, while on-chain systems depend on users navigating increasingly complex market structures. Both introduce new forms of risk, even as they attempt to address old ones. Crypto lending is not being rebuilt around a single model. It is being rebuilt around a disagreement over whether risk should be minimized through tighter structures or exposed and priced at the market level. That disagreement is not academic. It determines where risk sits, who is responsible for it, and how quickly it surfaces when conditions change. The last cycle showed what happens when that question is ignored. This time, the risk is not invisible. It is being pushed into the open, whether through structure or through design. What remains uncertain is whether that makes the system more resilient, or simply makes the trade-offs harder to overlook.