Aave Founder: What is the Secret of the DeFi Lending Market?

Author: Stani.eth
Translation: Ken, Chaincatcher

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Disclaimer: This article is a repost. Readers can find more information through the original link. If the author has any objections to the repost, please contact us, and we will make modifications according to the author’s requirements. Reposting is for information sharing only and does not constitute any investment advice nor does it represent Wu Shuo’s views and positions. On-chain lending began around 2017, initially as a marginal experiment related to crypto assets. Today, it has evolved into a market exceeding $100 billion, primarily driven by stablecoin lending, with crypto-native collateral such as Ethereum, Bitcoin, and their derivatives serving as guarantees. Borrowers release liquidity through long positions, execute leverage cycles, and engage in yield arbitrage. The focus is not on creativity but on validation. Past behavior shows that, even before institutional attention, automated lending based on smart contracts had genuine demand and product-market fit.

The crypto market remains volatile. Building lending systems on the most active existing assets forces on-chain lending to address risk management, liquidation, and capital efficiency immediately, rather than hiding these issues behind policies or discretionary decisions. Without crypto-native collateral, it’s impossible to see how powerful fully automated on-chain lending can be. The key is not cryptocurrencies as an asset class but the cost structure transformation brought by decentralized finance.

Why is on-chain lending cheaper?
On-chain lending is cheaper not because it’s new technology but because it eliminates layers of financial waste. Today, borrowers can access stablecoins on-chain at about 5% cost, while centralized crypto lending platforms charge interest rates between 7% and 12%, plus fees, service charges, and various surcharges. When conditions favor borrowers, choosing centralized lending is not conservative but irrational.

This cost advantage does not come from subsidies but from capital aggregation within open systems. Permissionless markets outperform closed markets in capital pooling and risk pricing because transparency, composability, and automation drive competition. Capital flows more quickly, idle liquidity is penalized, and inefficiencies are exposed in real-time. Innovation spreads instantly.

When new financial primitives like Ethena’s USDe or Pendle emerge, they absorb liquidity from the entire ecosystem and expand the use of existing primitives like Aave, without the need for sales teams, reconciliation processes, or back-office departments. Code replaces management costs. This is not just incremental improvement but a fundamentally different operating model. The advantages of all cost structures are passed on to capital allocators and, more importantly, benefit borrowers.

Every major historical transformation follows this pattern:

• Heavy asset systems become lightweight.
• Fixed costs become variable.
• Labor becomes software.
• Centralized economies of scale replace localized duplication.
• Surplus capacity transforms into dynamic utilization.

Initially, these changes seem bad. They serve non-core users (e.g., crypto lending rather than mainstream use cases), compete on price before quality improves, and before scale is achieved and existing companies can’t keep up, they appear unserious.

On-chain lending fits this pattern perfectly. Early users were mainly niche crypto holders. User experience was poor. Wallets felt unfamiliar. Stablecoins did not reach bank accounts. But none of this mattered because costs were lower, execution was faster, and access was global. As everything else improves, it becomes easier to access.

What’s next?
During bear markets, demand declines, yields compress, revealing a more important dynamic. Capital in on-chain lending is always in competition. Liquidity does not stagnate due to quarterly committee decisions or balance sheet assumptions. It is constantly re-priced in a transparent environment. Few financial systems are as ruthless as this.

On-chain lending is not short of capital but lacks sufficient collateral for lending. Today, most on-chain lending simply recycles the same collateral for the same strategies. This is not a structural limitation but a temporary one.

Cryptocurrencies will continue to generate native assets, productive primitives, and on-chain economic activity, expanding lending coverage. Ethereum is maturing into a programmable economic resource. Bitcoin is consolidating its role as a store of economic energy. Neither is the final state.

For on-chain lending to reach billions of users, it must incorporate real economic value, not just abstract financial concepts. The future involves integrating autonomous crypto-native assets with tokenized real-world rights and obligations, not to replicate traditional finance but to operate it at extremely low costs. This will be a catalyst for decentralized finance to replace the old financial backend.

Where did lending go wrong?
Today, high costs are not due to capital scarcity. Capital is abundant. The clearing rate for quality capital is 5% to 7%. For risk capital, it’s 8% to 12%. Borrowers still pay high interest because everything around capital is inefficient.

The lending process is bloated due to customer acquisition costs and delayed credit models. Binary approval processes lead to high costs for quality borrowers and subsidies for poor ones until default occurs. Service layers remain manual, compliance-heavy, and slow. Incentive mechanisms are misaligned at every level. Those pricing risk rarely bear the actual risk. Brokers do not assume default responsibility. Loan originators immediately sell off risk exposure. Regardless of outcomes, everyone gets paid. The real cost of lending is the flawed feedback mechanism.

Lending has not been disrupted because trust overrides user experience, regulation limits innovation, and losses are hidden before they explode, reinforcing conservatism rather than progress. As a result, lending still appears as an industrial-era product patched onto digital capital markets.

Breaking the cost structure
Unless loan issuance, risk assessment, service, and capital allocation are fully software-native and on-chain, borrowers will continue paying excessive fees, and lenders will rationalize these costs. The solution is not more regulation or marginal user experience improvements but breaking the cost structure itself.

Automation replaces processes. Transparency replaces discretion. Certainty replaces reconciliation. That is the disruption decentralized finance can bring to lending.

When on-chain lending becomes clearly cheaper than traditional lending in end-to-end operations, adoption is not a question but an inevitability. Aave emerged in this context, serving as a foundational capital layer for a new type of financial backend, supporting the entire lending ecosystem—from fintech companies to institutional lenders to consumers.

Lending will become the most empowering financial product simply because the cost structure of decentralized finance allows rapidly flowing capital to reach the most needed applications. Abundant capital will generate numerous opportunities.