Is DeFi still a liquidity leverage game, rather than a genuine credit game?

Aave's $48 billion lending is a form of cyclical leverage, and the true credit layer of DeFi has quietly emerged.
Written by: Sachin
Compiled by: AididiaoJP, Foresight News
DeFi TVL has reached approximately $93 billion, but it still hasn't achieved the most important thing: lending.
DeFi is not a true credit system yet; it is merely an overcollateralized liquidity engine.
DeFi lending and borrowing are fundamentally different: borrowing is over-collateralized borrowing, while lending is based on cash flow, trust, or real assets.
Currently, DeFi lending TVL is approximately $48 billion, accounting for about 50% of the entire market. Among them, @Aave dominates the market with a TVL of approximately $22 billion, active loans of approximately $18 billion, and a cumulative lending volume exceeding $1 trillion.
But what exactly are these so-called "loans"? They are not real loans, but rather leveraged cycles, arbitrage capital, and delta-neutral farming. No real credit is created; it's just capital being repeatedly recycled.
The structural failure of DeFi lending
Over-collateralization stifles credit. You need to lock up $150 to borrow $100, so there's no capital creation, only capital recycling. DeFi is optimized for trading, not genuine lending.
Yields have become unreliable. USDC yields on Aave are around 1.7–2%, while the risk-free rate (T-bills) is around 3.7%. You are taking on smart contract risk, liquidation risk, and oracle risk, yet you are only getting lower returns, which is structurally unsustainable.
Variable interest rate systems make real-world lending unusable. DeFi interest rates change per block based on utilization, following the Kink Model: once utilization exceeds approximately 90%, rates spike. A borrower might initially enter at 4%, then suddenly jump to 30–40%. No business loans, mortgages, or structured credit can operate in this environment. This is precisely why Aave Arc failed and why institutions remain reluctant to enter the market.
Fragmentation further exacerbates the problem. Liquidity is scattered across segregated pools, different collateral, and different chains, resulting in shallow liquidity, inefficient pricing, and an inability to form a unified credit market.
Therefore, DeFi did not develop into a credit system, but rather became a leverage engine. Its core mechanism remains the same:
Deposit collateral → Borrow stablecoins → Buy more yield assets → Cycle
Maximum leverage ratio = 1 / (1 - LTV)
A higher LTV simply brings more leverage, not more productive lending; it is essentially synthetic leverage.
DeFi is built on overcollateralized lending, while the credit layer will drive it toward low-collateralized, real-world-backed credit.
The real unlocking lies in RWA + standardization.
Loans are characterized by being illiquid, non-standardized, and indivisible, while DeFi requires assets that are interchangeable, liquid, and denominated by market value.
The credit layer has been launched, and multiple agreements are driving its large-scale development.
(Data source: rwa.xyz, tokenized lending by platform)
On-chain tokenized lending is expanding rapidly, with a total represented value exceeding $19 billion.
@Figure + @HastraFi has launched over $16 billion in HELOC (home equity credit), attracting $610 million in deposits and paying over $6.5 million in interest in just 4 months, with absolutely no incentives, demonstrating a real demand for on-chain credit.
@Kamino RWA has expanded to approximately $1.3 billion, with PRIME alone reaching approximately $600 million and yields of 7–10%, far exceeding the returns of traditional DeFi lending.
@Goldfinch_fi focuses on low-collateral real-world lending through its coupon pools, with approximately $56 million in active loans and yields of 10–12%, allowing on-chain users to access institutional-grade private credit.
@ClearpoolFin operates an unsecured institutional lending market, having initiated nearly $1 billion in loans and distributed over $10 million in returns to users, transforming real-world credit into liquid on-chain assets.
@BrilaFinance (formerly TrueFi) pioneered unsecured lending to institutions, has initiated approximately $1.7 billion in loans, maintains a strong track record, and is evolving towards a compliant credit market that generates real returns.
DeFi Credit Stack
TradFi is responsible for creating credit, while DeFi is responsible for transforming it into a liquid, composable market.
First layer: Asset origination (TradFi side)
Real loans, such as HELOC, auto loans, and SME loans, are created by banks, lending institutions, and credit funds. The real profits originate from this.
Key players: Figure (HELOC), Apollo, Fasanara Digital, Victory Park, Centrifuge, and other initiators.
Second layer: Structured (pure TradFi logic)
The original loan is converted into investable products through tranches, safety buffer reserves, and over-collateralization (approximately 2–2.4 times).
Main players: Centrifuge, Goldfinch.
The third layer: Tokenization (a bridge between TradeFi and DeFi)
By packaging loans into on-chain tokens and standardizing them (ERC-20 / Vault Tokens), illiquid assets are transformed into tradable standardized units.
Key players: Maple Finance, Securitize, Figure (Provenance).
Fourth layer: Liquidity and distribution
Users deposit funds, forming a market and distributing returns. DeFi provides liquidity and widespread distribution in this process.
Key players: Morpho, Kamino, curators (Gauntlet, Steakhouse Financial).
Fifth layer: DeFi usage layer
Transform credit tokens into financial primitives for collateralization, leverage cycles, and yield generation, achieving composability and capital efficiency.
Key players: Morpho Cycle, Kamino Multiply, Apollo Credit Cycle.
Distinguishing between signal and narrative
The lending layer is not yet fully resolved, still relying on off-chain due diligence, legal enforcement, and centralized originators, thus it is far from trustless. It will not replace TradFi lending, primarily acting as a distribution layer, while TradFi still controls origination, underwriting, and risk management. On-chain lending is not inherently more secure either; it introduces new risks such as oracle delays, collateral mismatches, and smart contract vulnerabilities. Institutional adoption is still pending—institutions require fixed interest rates and predictable cash flow, which DeFi still offers variable interest rates and fragmented liquidity, making them incompatible.
Summarize
DeFi lending is currently still a leveraged infrastructure, but the entire system is shifting towards allowing real credit to flow on it.
The credit stack has gradually taken shape at each layer: liquidity is concentrated on Aave and Morpho on the chain, the credit layer is connected through Maple, Hastra, Figure and other technologies, and the real economy is where this capital is ultimately deployed—for housing, car loans and business operations.
The core of the shift lies in distribution. TradFi offers returns but keeps them closed, while DeFi opens channels, routing capital onto the blockchain.
Kamino's on-chain HELOC pools (such as PRIME) attracted $610 million in deposits in four months, demonstrating the real demand.
DeFi is becoming a capital allocator, channeling liquidity to real-world credit, while underlying credit creation still primarily occurs off-chain.
RWA and hybrid DeFi-TradFi systems will continue to scale from here. The technology is in place; the next test is execution.