The cryptocurrency market is no stranger to explosive growth, with previous bull runs showcasing significant surges in market capitalization. However, since mid-2025, rallies appear to be losing steam despite being in a bullish phase. One potential factor lies within the decentralized finance (DeFi) sector, where lending and borrowing are dominating activities. Let’s dive deeper into how DeFi’s leverage mechanics might be contributing to shorter crypto rallies.
DeFi’s Role in Today’s Crypto Market
As of now, the total value locked (TVL) in DeFi protocols stands at around $152 billion. Out of this, borrowing accounts for approximately $49 billion—a staggering portion of overall activity. To maintain this borrowing level, lending pools require large deposits, further emphasizing the centrality of borrowing in DeFi.
Leading platforms like Aave and Compound are at the forefront. Aave alone boasts $24 billion in outstanding Ethereum loans, while Compound adds nearly $1 billion. Interestingly, stablecoins such as USDT and USDC dominate lending. On Aave, $5.94 billion in USDT and $4.99 billion in USDC have been borrowed, underscoring traders’ preference for stable digital assets as collateral.
Stablecoins and Leveraged Trading
The borrowed stablecoins are not kept idle but are instead directed toward exchanges, particularly derivatives platforms. Unlike spot exchanges that facilitate straightforward one-to-one trades, derivatives platforms allow traders to leverage these borrowed assets by 10x, 25x, or even 50x. Binance, for example, dominates the derivatives space with $44.2 billion in stablecoin liquidity, allowing for such aggressive leveraged trading strategies.
This preference for leverage over spot buying increases market fragility. When rallies occur, traders pile onto long positions driven by high leverage. However, even minor price pullbacks of 2-3% can lead to mass liquidations. This cycle effectively cuts rallies short, creating a recurring pattern of sharp reversals.
The Cost of Leverage and Risk of Liquidations
Using platforms like Aave, traders pay an annualized percentage rate (APR) for borrowing stablecoins. For example, borrowing USDT comes with an estimated 6% APR. While this cost is manageable for short-term trades, long-term leverage incurs mounting expenses. The higher the leverage (e.g., 10x or 50x), the smaller the price movement needed to cover the borrowing cost. However, these high-leverage trades also magnify liquidation risks, as even minor market swings can wipe out positions.
DeFi’s Impact on Rally Durations
DeFi’s lending and borrowing infrastructure has transformed how capital flows within the crypto ecosystem. Borrowed funds often bypass spot markets and go straight into leveraged trades, fueling speculation rather than spot demand. As a result, rallies frequently stall as forced liquidations interrupt upward momentum when markets attempt to climb.
Conclusion
While crypto’s bull market remains intact, DeFi’s structural reliance on borrowed stablecoins and leveraged trading may partly explain why recent rallies lack sustainability. To minimize these risks, traders can adopt more conservative strategies or consider platforms that encourage lower leverage trading.
For those exploring DeFi opportunities, tools like Aave allow for borrowing and lending, while reinforcing the need to understand associated risks. Always approach leveraged trading with caution and ensure thorough research before making any financial decisions.
