DeFi Lending Activity Slumps as Traders Unwind Positions During Market Volatility

Borrowing activity across decentralized finance (DeFi) platforms has taken a major hit as market-wide volatility forces crypto traders to deleverage in a hurry.

Protocols like Aave and Morpho have seen outstanding loans shrink dramatically since peaking in mid-December, according to data from DefiLlama. Aave’s borrowed value dropped to $10 billion from over $15 billion, while Morpho saw a fall to $1.7 billion from $2.4 billion.

The flight from risk is also reflected in plunging DeFi lending yields. Average U.S. dollar stablecoin returns dropped to 2.8% on Tuesday — a 12-month low — based on vaults.fyi benchmarks. That’s well below the 4.3% seen in traditional money markets, and far from the 18% DeFi highs just four months ago.

“This is a major risk-off rotation,” said Ryan Rodenbaugh, CEO of Wallfacer Labs. “Traders are paying down debt, liquidations are clearing out weak positions, and borrowing demand is drying up fast.”

The crash over the weekend only made things worse. Bitcoin (BTC) and Ethereum (ETH), which are heavily used as loan collateral, plunged 10–15%, triggering a wave of liquidations.

Aave alone processed over $110 million in forced loan liquidations, according to Chaos Labs CEO Omer Goldberg. Meanwhile, Sky (formerly MakerDAO) was hit with one of the largest liquidations in recent memory — a $74 million DAI loan backed by 67,570 ETH was wiped out. Another whale rushed to pay off part of a $66 million loan, slashing their debt to $28 million in a bid to avoid the same fate.

Even though lending capital on DeFi platforms has remained steady, the shrinking demand for loans means lenders are earning far less. “That’s the painful part,” Rodenbaugh said. “Fewer borrowers, same amount of lenders — so yields take a hit.”

With stablecoin rates at rock bottom and major borrowers pulling back, DeFi lenders are facing a harsh new environment — and the road to recovery could be bumpy unless confidence returns to the crypto markets.