The DeFi lending landscape has undergone significant transformation in recent months. This article highlights several new lending protocols, examines key data, and explores overarching trends poised to influence the next market cycle.
New Players in DeFi Lending
A new wave of protocols is introducing innovative models to the DeFi lending space.
dAMM Finance and Ribbon Finance
These platforms offer undercollateralized, variable-rate lending. Similar to Aave’s pool-based model, they enable frictionless deposits and loans, reducing barriers for users.
LULO Finance
LULO operates a fixed-rate, peer-to-peer order book on-chain. Much like Morpho, it eliminates the traditional lender/borrower spread found in pool-based models by directly matching counterparties.
Arcadia Finance
This protocol allows borrowers to collateralize multiple assets—including ERC-20 tokens and NFTs—within a single vault. These vaults are NFTs themselves, enabling composable secondary products. Lenders can select their risk exposure based on vault quality.
ARCx
ARCx evaluates borrowers based on their on-chain transaction history. A stronger history (e.g., no prior liquidations) results in a higher loan-to-value (LTV) ratio. The platform has already facilitated loans at 100% LTV. Lenders provide liquidity based on the borrower’s credit risk.
Competitive Landscape and Market Positioning
dAMM and Ribbon are emerging as direct competitors to Maple and Atlendis in the institutional undercollateralized lending segment.
Arcadia, ARCx, and Frax represent evolved versions of existing models, reflecting a trend toward specialization and enhanced feature sets.
Many protocols are pursuing vertical integration to strengthen their competitive moats and improve value capture. For example:
- Frax offers a stablecoin, automated market operations (AMO), an AMM, and liquid staking.
- Aave has expanded into stablecoins, undercollateralized lending, and real-world assets (RWA).
- ARCx provides credit scoring.
- Ribbon combines vaults with lending services.
The Role of Long-Tail Assets
Several protocols are focusing on long-tail assets—those with lower short-term demand.
In the institutional segment, dAMM stands out by already supporting numerous long-tail assets. Euler Finance allows lending and borrowing for any asset, with some eligible as collateral.
Market Share and Growth Trends
Currently, Aave leads the market, partly due to its aggressive multi-chain expansion—37% of its total value locked (TVL) resides on Layer 2 or other EVM-compatible chains.
Compound v3 has seen slow migration from v2, which remains firmly in second place. Maple is the most popular platform for undercollateralized lending.
Over the past month, Euler and Clearpool were the only established platforms that experienced significant growth. Aave and Compound performed moderately, while Kashi saw the largest decline.
Although most lending TVL remains on Ethereum Mainnet, EVM-compatible chains and Layer 2 solutions are gradually capturing market share. The next cycle will likely see accelerated demand and liquidity growth on these networks.
Current Lending Dynamics
Overcollateralized lending continues to dominate in terms of TVL. However, this gap is expected to narrow as more institutional capital enters the on-chain space, facilitated by KYC and zero-knowledge (ZK) based verification systems.
Blue-chip assets currently attract the vast majority of liquidity. Euler is the most prominent protocol focusing on long-tail assets, though these make up less than 5% of its TVL—primarily due to the opportunity cost of staking. For instance, why would a user deposit GRT tokens into Euler when illiquid staking offers significantly higher annual percentage rates (APR)?
This dynamic may shift as more Web3 and DeFi protocols introduce liquid staking derivatives, allowing users to earn yield while lending their tokens.
Verticalization and Market Concentration
Vertical integration is a notable trend across DeFi. Lending is not the only sector experiencing increasing market concentration—Lido, Uniswap, and MakerDAO each command significant shares in their respective categories.
Over time, DeFi (including lending) may continue to consolidate, mirroring the growth pattern of large traditional banks. This can be attributed to three factors: strong network effects, verticalization (turning products into features), and brand moats.
👉 Explore advanced lending strategies
Frequently Asked Questions
What is undercollateralized lending in DeFi?
Undercollateralized lending allows borrowers to access loans without providing full collateral. This is often based on creditworthiness assessed via on-chain history or other verification methods, reducing capital inefficiency.
How do fixed-rate lending protocols work?
Fixed-rate lenders use mechanisms like peer-to-peer order matching or tokenization to offer stable borrowing costs. This protects users from interest rate volatility common in variable-rate models.
Why are long-tail assets important in DeFi lending?
Long-tail assets represent a broader set of cryptocurrencies beyond blue-chips. Supporting them increases market inclusivity and provides more opportunities for diversification and yield.
What is verticalization in DeFi?
Verticalization refers to protocols expanding their services to cover multiple related functions—such as lending, trading, and asset management—within a single platform, improving user experience and retention.
How does credit scoring work in DeFi?
Protocols like ARCx analyze users’ on-chain behavior, such as repayment history and wallet activity, to assign a credit score. This enables better risk assessment for undercollateralized loans.
What role do Layer 2 solutions play in DeFi lending?
Layer 2 networks offer lower transaction fees and faster settlements, making DeFi lending more accessible and efficient. This encourages greater adoption and liquidity across ecosystems.
Future Experiments in DeFi Lending
Several innovative concepts are emerging on the horizon:
- ZK-Proof Based Undercollateralized Lending: Using zero-knowledge proofs to verify off-chain collateral without exposing sensitive data.
- Social NFT-Backed Loans: Allowing borrowers to use socially valuable NFTs as loan collateral.
- DAO-Focused Lending: Designing loan products tailored specifically for decentralized autonomous organizations (DAOs).
These developments highlight a continued focus on expanding accessibility, risk mitigation, and user-oriented innovation.