Borrowing across decentralized finance (DeFi) platforms is sharply contracting as investors retreat from risk amid heightened crypto market turbulence.
Total borrowings on major protocols like Aave and Morpho have plummeted since mid-December, with Aave’s loan volume falling from over $15 billion to $10 billion, and Morpho’s dropping from $2.4 billion to $1.7 billion, according to DefiLlama.
The downturn comes as traders unwind leveraged positions or are forced into liquidations due to falling crypto prices. Over the weekend, both bitcoin (BTC) and ether (ETH) — commonly used as loan collateral — dropped 10–15%, triggering widespread liquidations.
Aave alone recorded over $110 million in liquidations, while MakerDAO (now Sky) saw a $74 million DAI loan backed by 67,570 ETH liquidated. Another large loan backed by 65,000 ETH was partially repaid to reduce exposure and avoid similar losses.
The risk-off shift is reflected in plummeting stablecoin yields. The average return on DeFi lending dropped to 2.8% — the lowest in a year — well below the 4.3% average U.S. money market yield.
“This deleveraging cycle is putting heavy pressure on both borrowing demand and lender returns,” said Ryan Rodenbaugh, CEO of Wallfacer Labs. “Capital is sitting idle, and yields are under stress.”
Despite stable deposit levels, the steep decline in demand underscores growing investor caution as the crypto market remains volatile.
