New Scam, Same as the Old One
DeFi's $73.6 billion lending boom is rehypothecation with extra steps
The crypto lending market just hit $73.6 billion, a new all-time high. Cue the institutional spin machine claiming this new peak is structurally robust because the market pivoted to overcollateralized decentralized finance.
This is the oldest trick in the book: change the shell game, keep the addiction intact.
They replaced the opaque contagion of BlockFi and Celsius with a new, equally contagious, protocol-based architecture.
The 2020-2021 cycle was built on institutional rehypothecation. Not some complex financial theory. Just the brazen reuse of client collateral, multiple times, to secure various loans.
Centralized lenders like BlockFi, Celsius, Genesis, and Voyager controlled 82% of the market at their peaks. Their business model: promise unsustainably high yields, then generate those yields through aggressive, opaque lending strategies.
One dollar of deposited collateral could appear as $4 to $6 of extended credit exposure across institutional balance sheets. The math inflated effective market leverage far beyond what anyone could see.
Regulatory filings from Celsius stated it plainly. The platform was permitted to use assets in its sole discretion, including rehypothecating those assets to take out additional loans.
When prices dropped, the entire structure collapsed. Cascading liquidations. Fire sales. Bank runs. The hidden liabilities created by that multiplier destroyed everything simultaneously.
Now? DeFi dominates. As of Q2 2025, outstanding loans on DeFi applications hit $26.47 billion. CeFi institutional borrows? Just $17.78 billion.
DeFi protocols can’t perform traditional credit checks, so they require overcollateralization. Borrowers deposit collateral worth more than the loan amount. This creates a $1-to-$1 credit reality. No more synthetic multiplier.
Sounds safer, right?
Here’s the problem. The economic demand for yield didn’t disappear. It migrated.
Enter Liquid Staking Derivatives.
LSDs like stETH are tokens representing staked assets. They accrue rewards. And crucially, they can be used as collateral on DeFi lending protocols.
Stake Ethereum. Receive stETH. Deposit stETH into Aave. Borrow against it. Use the borrowed funds to buy more Ethereum. Stake that. Repeat.
This is leverage staking. Multi-layered collateral reuse, built entirely through composable smart contracts. It’s rehypothecation, just decentralized and automated.
If the derivative token devalues, liquidation activities introduce selling pressures that destabilize other positions. The contagion mechanism isn’t gone. It’s just coded differently.
They didn’t eliminate the systemic cascade. They digitized it and put it on the blockchain.
Much of the current borrowing is legitimate. Tax efficiency, liquidity management. Borrowing stablecoins against volatile holdings to avoid capital gains taxes. That’s real use.
But institutional money is already engineering the next version. Studies show regulated institutions actively seeking securitization and rehypothecation-like structures within regulated DeFi frameworks.
The battle against leverage never ends. The current de-risking is a momentary lull before capital efficiency demands force the recreation of complex financial instruments.
The $73.6 billion credit peak represents more real, collateralized capital than the synthetic 2021 peak of $64.4 billion. That part is true.
But it also represents a market that’s already built the next-generation vector for the old demon. Rehypothecation chains, now hidden inside composable code that anyone can audit but few understand.
Analysts relying on traditional leverage metrics are structurally misled. The Market Cap to Open Interest ratio was calibrated against a system full of synthetic leverage. It can’t capture the risk profile of protocol-based contagion.
Everyone saw the last one coming. Except the ones paid not to.
The next one is already being coded.
My Open Tabs:
Decrypting financial stability risks in crypto-asset markets
The State of Crypto Leverage – Q2 2025
More reason things will blow up thanks to hidden leverage.