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

Original Title: Disrupting the Cost Structure of Lending
Original Author: Stani.eth, AAVE Founder

Translation: Ken, Chaincatcher

On-chain lending began around 2017 as a fringe experiment associated with only crypto assets. Today, it has evolved into a market exceeding $100 billion, primarily driven by stablecoin lending, predominantly collateralized by crypto-native assets such as Ethereum, Bitcoin, and their derivatives. Borrowers unlock liquidity through multi-positioning, execute leverage loops, and engage in yield farming. It's not about creativity but validation. Behavior over the past few years indicates that even before institutions took notice, smart contract-based automated lending had genuine demand and true product-market fit.

The crypto market still exhibits volatility. Building lending systems atop the most vibrant existing assets has forced on-chain lending to address risk management, liquidation, and capital efficiency concerns upfront rather than hiding them behind policy or human discretion. Without crypto-native collateral, we wouldn't have seen how powerful fully automated on-chain lending can be. The key isn't the cryptocurrency as an asset class but the cost structure transformation brought by decentralized finance.

Why On-Chain Lending is Cheaper

The reason on-chain lending is cheaper is not because it's a new technology but because it eliminates layers of financial waste. Today, borrowers can obtain stablecoins on-chain at around a 5% cost, while centralized crypto lending institutions charge 7% to 12% interest plus fees, service charges, and various additional costs. Opting for centralized lending when conditions favor borrowers is not only not conservative but even irrational.

This cost advantage doesn't stem from subsidies but from capital aggregation in an open system. Permissionless markets excel in capital aggregation and risk pricing structurally over closed markets because transparency, composability, and automation foster competitive dynamics. Capital flows faster, idle liquidity is penalized, and inefficiency is exposed in real time. Innovation spreads immediately.

When new financial primitives like Ethena's USDe or Pendle emerge, they absorb liquidity from the entire ecosystem, expanding the utility of existing financial primitives like Aave without the need for a sales team, reconciliation processes, or back-office departments. Code replaces management costs. This is not just an incremental improvement; it's a fundamentally different operational model. All cost structure advantages flow to capital allocators, with borrowers benefiting most.

Every major transformation in modern history has followed the same pattern. Heavy asset systems become light asset systems. Fixed costs become variable costs. Labor turns into software. Centralized scale efficiency replaces local duplication. Surplus capacity transforms into dynamic utilization. The changes initially look messy. They serve non-core users (e.g., focused on cryptocurrency lending rather than mainstream use cases), compete on price before quality, and do not seem serious until they scale and incumbents cannot respond.

On-chain lending fits this pattern perfectly. Early users were niche cryptocurrency holders. The user experience was poor. Wallets were alien. Stablecoins did not touch bank accounts. But none of that mattered because it was cheaper, faster, and globally accessible. As everything else improved, it became more accessible.

What Comes Next

During a bear market, demand drops, yields compress, revealing a more critical dynamic. Capital in on-chain lending is always in competition. Liquidity does not stall due to a quarterly committee decision or a balance sheet assumption. It continually reprices in a transparent environment. Few financial systems are as ruthless.

On-chain lending does not lack capital but lacks assets to lend against. Today, most on-chain lending recycles the same collateral for the same strategies. This is not a structural limit but a temporary one.

Cryptocurrency will continue to produce native assets, productive primitives, and on-chain economic activity to expand lending's scope. Ethereum is maturing into a programmable economic resource. Bitcoin is solidifying its role as an economic energy store. Neither is a final state.

If on-chain lending is to reach billions of users, it must absorb real economic value, not just abstract financial concepts. The future will merge sovereign crypto-native assets with tokenized real-world equities and obligations, not to replicate traditional finance but to operate it at vastly lower costs. This will be the catalyst for decentralized finance replacing the old financial backend.

Where Lending Went Wrong

Today, lending is expensive not because capital is scarce. Capital is plentiful. Prime capital's liquidation rate is 5% to 7%. Risk capital's liquidation rate is 8% to 12%. Borrowers still pay high rates because everything around capital is inefficient.

The lending origination step has become bloated with customer acquisition costs and lagging credit models. Binary approvals lead to prime borrowers overpaying while subprime borrowers get subsidized until default. Servicing remains manual, compliance-heavy, and slow. Incentives at each layer are misaligned. Those pricing risk seldom bear the risk. Brokers do not bear default risk. Loan originators immediately sell off risk exposure. Everyone gets paid regardless of outcomes. It is the defects in the feedback mechanisms that are the true cost of lending.

Lending has not been disrupted because trust has prevailed over user experience, regulation has restricted innovation, and losses have masked inefficiencies before they erupt. The collapse of lending systems is often catastrophic, reinforcing conservatism over progress. Therefore, lending still appears to be awkwardly patched onto the digital capital markets as a product of the industrial age.

Breaking the Cost Structure

Unless loan origination, risk assessment, servicing, and capital allocation are fully software-native and on-chain, borrowers will continue to pay exorbitant costs, while lenders will continue to rationalize these costs. The solution is not more regulation or incremental user experience improvements. It is about breaking the cost structure. Automation replaces processes. Transparency replaces discretion. Determinism replaces reconciliation. This is the disruption decentralized finance can bring to lending.

When on-chain lending becomes significantly cheaper to operate end-to-end compared to traditional lending, ubiquity is not a question but an inevitability. Aave has emerged in this context, able to act as the foundational capital layer of the new financial backend, serving the entire lending space from fintech firms to institutional lenders to consumers.

Lending will become the most empowering financial product simply because the cost structure of decentralized finance will enable fast-flowing capital to reach the most capital-starved use cases. Abundant capital will spawn myriad opportunities.

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