One dollar in bank deposits generates ten times the revenue for the bank compared to an equivalent amount of USDC on Aave. This phenomenon reflects the current structural characteristics of the cryptocurrency market rather than the long-term potential of on-chain lending.
(Background: Visa has launched USDC stablecoin settlement in the US, with two banks cooperating to break the weekend vacuum)
(Additional context: Digital banks have long since stopped relying on banks for profit; the real goldmine lies in stablecoins and identity verification)

Table of Contents

• The Role of On-Chain Credit
• Actual Uses of Borrowers on Aave
• Comparison Between Banks and On-Chain Lending Markets
• Breaking Lending from the “Cycle Ties” of Cryptocurrency

One dollar in bank deposits generates ten times the revenue for the bank compared to an equivalent amount of USDC on Aave. While this seems unfavorable for DeFi lending, it more accurately reflects the current structural features of the crypto market rather than the long-term potential of on-chain credit.

This article will explore the following questions: the actual application methods of current lending protocols, why their profit margins are structurally lower than banks, and how this situation might change as lending gradually detaches from the native leverage cycles of crypto.

The Role of On-Chain Credit

My first job involved analyzing bank books and assessing borrower qualifications. Banks lend credit funds to real-world enterprises, with profit margins directly related to macroeconomic factors. Similarly, analyzing borrower conditions in decentralized finance protocols helps understand the role of credit in the on-chain economy.

Aave’s outstanding loans have surpassed $20 billion, a remarkable achievement — but why do people borrow on-chain?

Actual Uses of Borrowers on Aave

Borrowers’ strategies can be categorized into four types:

1. Using interest-bearing ETH as collateral to borrow WETH: The yield on staked ETH is usually higher than WETH, creating a structural basis for basis trading( which is essentially “borrowing WETH to earn yield”). Currently, this type of trading accounts for 45% of total outstanding loans, mostly funded by a few “whales.” These wallets are often associated with staked ETH issuers( such as EtherFi and other “cyclic stakers.” The risk of this strategy lies in the sudden rise of WETH lending costs, which can quickly cause collateral health to fall below liquidation thresholds.

![Estimated WETH lending rate chart: if the rate stays below 2.5%, basis trading can be profitable])(

2. Stablecoin and PT cyclic staking: Yield-bearing assets) like USDe( can also form similar basis trades, with yields potentially higher than USDC lending costs. Before October 11, this strategy was very popular. Although structurally attractive, it is highly sensitive to changes in funding rates and protocol incentives — which explains why the scale of such trades shrinks rapidly when market conditions change.

3. Volatility collateral + stablecoin debt: This is the most popular strategy among users, serving two main needs: one is to leverage and increase crypto holdings; the other is to re-invest borrowed stablecoins into high-yield “liquidity mining” for basis trading. This strategy is directly related to mining yield opportunities and is a primary driver of stablecoin lending demand.

4. Other residual types: including “stable collateral + volatile debt”) used for shorting assets( and “volatile collateral + volatile debt”) used for currency pair trading(.

![1) Distribution of wallet borrowing strategies on Aave; 2) Wallet counts corresponding to each strategy])(

![Collateral health ratio chart weighted by borrowed amount])(

For each of these strategies, there exists a value chain composed of multiple protocols: these protocols leverage Aave to integrate the trading process and distribute yields to retail users. Today, this integration capability is the core competitive barrier in the crypto lending market.

Among them, the “volatility collateral + stablecoin debt” strategy contributes the most marginally to interest income) with USDC and USDT lending yields accounting for over 50% of total revenue(.

![Interest income distribution by asset type chart])(

Although some enterprises or individuals do use crypto loans to finance operations or real-life expenses, compared to the “on-chain leverage/arbitrage” use case, the scale of such practical applications is very limited.

Three core factors driving the growth of lending protocols:

2. On-chain yield opportunities: such as new project launches, liquidity mining) for example, Plasma platform’s mining activities(;
3. Structurally deep basis trading with high liquidity: such as ETH/wstETH trading pairs and stablecoin-related trades;
4. Cooperation with major issuers: such collaborations help develop new markets), e.g., the combination of pyUSD stablecoin and RWA(.

The lending market mechanism is directly linked to “crypto GDP”), showing beta correlation(, much like how banks are essentially a barometer of “real-world GDP.” When crypto prices rise, yield opportunities increase, the scale of interest-bearing stablecoins expands, and issuers adopt more aggressive strategies — ultimately driving growth in lending protocol revenues, token buybacks, and an increase in Aave token prices.

![Correlation chart of lending market valuation and revenue: lending market valuation is directly related to revenue])(

) Comparison Between Banks and On-Chain Lending Markets

As mentioned earlier, the profit efficiency of $1 in banks is ten times that of $1 USDC on Aave. Some see this as a negative signal for on-chain lending, but I believe it is an inherent result of market structure, for three reasons:

2. Higher financing costs in crypto: banks’ financing costs are based on the Federal Reserve’s benchmark interest rate###, which is lower than treasury yields(, whereas USDC deposits on Aave typically have yields slightly above treasury yields;
3. Traditional commercial banks’ risk transformation activities are more complex and should command higher premiums: large banks manage billions of dollars in unsecured loans to enterprises), such as financing data center construction(, and the risk management difficulty is far higher than “ETH cyclic staking collateral management,” thus they should earn higher returns;
4. Regulatory environment and market dominance: banking is an oligopolistic industry with high customer switching costs and significant barriers to entry.

) Breaking Lending from the “Cycle Ties” of Cryptocurrency

Successful crypto tracks are gradually detaching from the market’s own ups and downs. For example, the open interest of futures markets continues to grow even amid price volatility; stablecoin supply is similarly less volatile, far below other crypto assets.

To better align with the broader credit market operation model, lending protocols are gradually incorporating new risk types and collateral:

• Tokenized RWA and stocks;
• On-chain credit originating from off-chain institutions;
• Using stocks or real-world assets as collateral;
• Implementing structured underwriting through crypto-native credit scoring.

Asset tokenization creates conditions for lending businesses to become the “natural endpoint” in crypto. When credit activities decouple from price cycles, their profit margins and valuations will also shed their cyclical constraints. I expect this transition to begin manifesting around 2026.

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