Why Institutional Capital Quietly Made DeFi Lending Infrastructure Real

Decentralized lending platforms experienced sustained growth through a period that challenged many crypto-native narratives. The distinction between speculative activity and genuine infrastructure development became increasingly clear as market participants sought yield in an environment of compressed traditional returns. This wasn’t simply another cycle of hype—it reflected deeper structural changes in how capital accessed credit markets globally.

The macro environment created conditions that favored decentralized alternatives in ways that previous market cycles did not. Interest rate differentials between traditional savings vehicles and DeFi lending rates remained substantial even as central banks globally pursued tightening policies. More importantly, the infrastructure supporting decentralized lending matured beyond proof-of-concept status, enabling larger-scale participation with manageable counterparty risks.

Institutional attention shifted from curiosity to active allocation as protocols demonstrated operational resilience through multiple market cycles. The collapse of several high-profile centralized entities during 2022 actually accelerated this shift, as sophisticated participants recognized that decentralized alternatives offered transparency advantages that centralized counterparts could not match. When counterparty risk became the dominant concern, protocols with auditable smart contracts and verifiable collateral started looking less experimental and more like genuine infrastructure.

Key macroeconomic factors driving DeFi lending adoption

The convergence of several macro-level forces created the conditions for decentralized lending growth. Traditional banking systems globally faced margin compression, reducing lending capacity while regulatory requirements increased compliance costs that filtered down to retail borrowers. This supply constraint in conventional credit channels pushed portions of borrowing demand toward alternatives. Simultaneously, emerging market currencies experienced volatility that made dollar-pegged stablecoin lending particularly attractive for participants seeking USD-denominated yields without direct access to US financial infrastructure. Real yields in traditional markets remained negative or near-zero for extended periods, making DeFi lending rates—often delivering 3-8% on stablecoin deposits—appear increasingly compelling for yield-seeking capital.

Protocol TVL Distribution: Where Growth Concentrated

Total Value Locked in decentralized lending protocols evolved significantly over the examined period, with distribution patterns shifting away from Ethereum dominance toward a genuinely multi-chain landscape. This transition wasn’t merely a matter of TVL moving to alternative networks—it reflected fundamental changes in how users and capital approached cross-chain activity, with ecosystem-specific use cases driving deployment decisions rather than simple yield chasing.

Ethereum maintained its position as the largest single ecosystem for DeFi lending TVL, but its market share contracted meaningfully as users and protocols recognized that specialized use cases warranted specialized infrastructure. Layer 2 solutions on Ethereum captured a portion of this shift, with protocols deploying on Arbitrum, Optimism, and eventually zkSync and Starknet accumulating significant TVL through improved user experience and reduced transaction costs.

BNB Chain emerged as the second-largest ecosystem for lending activity, driven by its established user base and lower fee structure attracting retail participants who found Ethereum mainnet transactions economically impractical for smaller positions. Solana experienced significant TVL recovery following its network stability improvements, with lending protocols like Solend and Kamo capturing substantial user activity from participants who valued high throughput and sub-second finality.

Emerging ecosystems including Polygon, Cosmos-based chains, and newer entrants like Aptos and Sui captured meaningful TVL by targeting specific user segments or offering novel architectural approaches. Cosmos-based protocols benefited from the interchain ecosystem’s emphasis on sovereignty and customization, attracting users and developers who prioritized composability over TVL accumulation. This fragmentation, while initially viewed as a weakness, evolved into a feature that allowed each ecosystem to optimize for its particular user base rather than attempting to serve all use cases uniformly.

Regulatory Clarity: Jurisdiction-by-Jurisdiction Analysis

The regulatory landscape for decentralized lending platforms developed unevenly across major jurisdictions, creating a patchwork of clarity that significantly influenced where institutional capital could legally flow. The European Union emerged as the clear leader in establishing operational frameworks, while the United States maintained an interpretive approach that left substantial uncertainty for market participants seeking compliant access to DeFi lending markets.

The European Union’s Markets in Crypto-Assets regulation, commonly known as MiCA, provided the most comprehensive framework for crypto-asset services including lending activities. The regulation established clear categories for different service types, capitalization requirements for service providers, and operational standards that enabled firms to build compliant infrastructure with reasonable confidence about regulatory expectations. This clarity attracted significant institutional interest, with several major European financial institutions developing or acquiring capabilities to participate in DeFi lending markets through regulated channels.

The United States approach remained fundamentally different, with multiple regulatory agencies asserting jurisdiction without establishing clear rules for decentralized lending specifically. The SEC’s enforcement-heavy approach created chilling effects that discouraged many institutional participants from engaging with DeFi protocols directly, even when the legal status of specific activities remained genuinely ambiguous. This interpretive uncertainty paradoxically benefited centralized, regulated entities that could offer yield products with clear compliance frameworks, even as those yields often lagged what decentralized alternatives provided.

Compliance requirements by major jurisdiction

Jurisdictional differences created practical barriers that shaped institutional strategy. In the EU, MiCA-compliant operations required appropriate licensing, capital reserves aligned with custodial responsibilities, and robust operational security requirements. Singapore established a more nuanced framework that distinguished between different types of crypto-asset activities while maintaining strict licensing requirements. Hong Kong emerged as an increasingly important jurisdiction, with its virtual asset licensing regime attracting firms seeking access to Asian markets with clearer regulatory parameters than mainland China offered. The United Kingdom developed its own approach through the Financial Services and Markets Act, creating a framework that many expected would eventually align more closely with EU standards while maintaining distinctive features.

These regulatory disparities meant that institutional participants often operated through multiple legal vehicles, accessing DeFi lending markets through EU subsidiaries for European exposure while navigating more complex structures—or abstaining entirely—for US-related activities. The compliance overhead associated with multi-jurisdictional operations created natural advantages for larger institutions capable of absorbing these costs while making participation challenging for smaller players.

Institutional Entry: Mechanisms and Capital Allocation Patterns

Institutional participation in decentralized lending required infrastructure that the pure wallet-to-protocol model couldn’t provide. The narrative of institutions rushing directly into DeFi lending overlooked the substantial intermediaries, wrapper structures, and compliance frameworks that actually enabled meaningful capital allocation. Pure wallet-based access remained a minority share of institutional activity, with most sophisticated participants requiring structural accommodations that the original DeFi paradigm wasn’t designed to support.

The wrapper structure approach became the dominant mechanism for institutional DeFi lending participation. These wrappers created legal entities that held protocol positions while providing the governance, compliance, and reporting layers that institutional investors required. The wrapper held tokens on behalf of the institutional vehicle, managed tax reporting requirements, and provided the audit trails that investment committees and limited partners demanded. This approach sacrificed some of the trustlessness that DeFi purists valued while enabling participation from entities that regulatory frameworks or internal policies wouldn’t permit direct protocol interaction.

Custodial and prime brokerage services evolved to fill the gap between institutional requirements and DeFi protocol capabilities. These services offered varying degrees of decentralization—from fully custodial solutions that merely provided DeFi access through traditional interfaces to non-custodial structures that maintained user control while adding institutional-grade operational infrastructure. The fees associated with these services compressed over time as competition increased, though they remained significant enough to impact net returns compared to direct protocol participation.

Institutional onboarding mechanisms

The pathways through which institutions accessed DeFi lending evolved into several distinct models. Direct protocol interaction remained feasible only for entities without regulatory constraints, typically family offices or high-net-worth individuals operating personal capital. Fund structures that obtained appropriate legal opinions on the nature of DeFi lending activities emerged as the primary vehicle for traditional investment funds, with these structures requiring substantial legal documentation and often limiting the protocols or asset types they could access. Prime brokerage offerings from established crypto financial institutions integrated DeFi lending access into broader crypto-asset trading and custody infrastructure, enabling institutions already using these services to add yield generation with minimal operational overhead. The emergence of dedicated DeFi-focused funds—launched by both crypto-native managers and traditional financial institutions—provided access for investors who lacked the operational capability to participate directly but sought exposure to the asset class through experienced managers.

Capital allocation patterns showed institutional participants concentrating in specific segments rather than dispersing across the full DeFi lending landscape. Stablecoin lending dominated institutional activity, with USDC and USDT deposits capturing the majority of institutional yield-generating positions due to their relative predictability and the reduced smart contract risk these assets presented compared to volatile crypto collateral. Institutional participation in variable-rate crypto collateralized lending remained more limited, with participants who engaged typically doing so through specialized vehicles with clear risk management parameters.

Interoperability Standards: The Cross-Chain Protocol Landscape

Cross-chain infrastructure evolved substantially during the examined period, moving beyond the simple bridging solutions that characterized early multi-chain strategies toward more sophisticated paradigms that addressed the fragmentation risks that plagued the ecosystem. The recognition that value and liquidity fragmentation created systemic vulnerabilities drove investment in interoperability standards that could maintain security guarantees while enabling meaningful cross-chain communication.

The bridging solutions that had enabled early multi-chain activity revealed significant vulnerabilities through several high-profile exploits that exposed fundamental limitations in their security models. These incidents—where bridges lost hundreds of millions in value due to smart contract vulnerabilities or validator collusion—catalyzed movement toward alternative approaches that didn’t require trusted intermediaries or centralized bridging infrastructure.

Native asset paradigms gained adoption as protocols developed the ability to represent assets across chains without requiring traditional bridge structures. This approach maintained asset verification through the original chain’s consensus while enabling use on destination chains, eliminating the trusted intermediary that bridging solutions required. LayerZero and similar protocols provided the technical foundation for these developments, enabling cross-chain messages with verifiable proofs rather than trusted validator sets.

Interoperability improvements enabled lending protocols to offer genuinely multi-chain experiences that hadn’t been possible when liquidity remained siloed on individual chains. Users could deposit collateral on one chain and borrow on another, with the protocol managing the cross-chain mechanics transparently. This capability proved particularly valuable for users seeking to access specific yield opportunities or liquidity conditions that varied across chains, reducing the friction that had previously limited multi-chain activity to sophisticated participants willing to manage positions across multiple interfaces.

Security Evolution: Vulnerability Patterns and Mitigation Architecture

The nature of smart contract vulnerabilities in lending protocols shifted fundamentally during the examined period, with attack vectors evolving from the reentrancy bugs that had characterized earlier exploits toward more sophisticated approaches targeting oracles, governance mechanisms, and protocol-level interactions. This evolution required correspondingly different mitigation approaches that went beyond simple code auditing toward comprehensive security architecture.

Reentrancy vulnerabilities—where malicious contracts could recursively call vulnerable functions to drain funds—dominated early DeFi exploits and remained present in newer protocols that didn’t learn from historical incidents. However, the most significant attacks during the examined period targeted different surfaces entirely. Oracle manipulation attacks exploited the price feed mechanisms that lending protocols relied upon to determine collateral values, with attackers using flash loans to temporarily distort asset prices and trigger liquidations or extract unfairly valued collateral.

Governance exploits emerged as a particularly challenging category, as they often required no smart contract vulnerability at all—instead attacking the governance mechanisms that controlled protocol parameters. These attacks typically involved accumulating sufficient governance power to propose and pass malicious changes, then executing those changes before the community could respond. The speed at which these attacks could occur, combined with the immutable nature of many governance-executed changes, made them particularly devastating when successful.

Vulnerability categories and mitigation approaches

Protocol teams and the security community developed layered defenses addressing the evolved threat landscape. Oracle security improved through time-weighted average price implementations, multiple oracle sources with deviation thresholds, and the integration of Chainlink and similar services that provided more robust price feeds that on-only solutions could offer. These improvements made oracle manipulation attacks significantly more expensive and difficult to execute successfully, though they added protocol complexity and ongoing costs.

Governance security evolved toward time-locked upgrades that delayed execution of parameter changes, giving communities opportunity to review and potentially veto malicious proposals. Some protocols implemented governance tracking systems that flagged unusual governance activity, while others moved critical functions outside governance control entirely, recognizing that complete decentralization of all protocol parameters created unacceptable attack surfaces. Formal verification practices gained adoption as protocols sought mathematical guarantees about smart contract behavior rather than relying solely on human code review.

The emergence of insurance products specifically covering DeFi lending protocols provided an additional layer of protection that hadn’t existed in earlier periods. These products, often structured as mutual insurance pools or parametric coverage products, offered protection against specific exploit types in exchange for regular premiums. While coverage remained limited compared to traditional insurance markets and premiums could be substantial, the existence of these products represented maturation of the risk management ecosystem surrounding DeFi lending.

Hybrid Models: Where Traditional Finance Meets Decentralized Lending

Actual integration between traditional financial institutions and decentralized lending occurred through mechanisms that preserved the compliance and control frameworks that banks and institutional investors required, rather than through direct protocol interaction. The vision of seamless connection between TradFi and DeFi proved premature—the integration that actually materialized created two-tier liquidity markets with distinct characteristics, participants, and risk profiles.

Permissioned pools emerged as the primary integration mechanism, offering regulated access to DeFi lending yields through structures that maintained control over participant eligibility and operational parameters. These pools operated on the same smart contract infrastructure as permissionless DeFi protocols but restricted participation to verified institutional investors, with off-chain know-your-customer requirements enforced through on-chain proof systems. The yields available in these pools often differed from permissionless alternatives, with the spread reflecting the reduced counterparty risk that verified participants and compliant operations provided.

Custodial wrappers enabled traditional financial institutions to offer DeFi lending access to their clients without requiring those clients to interact directly with blockchain infrastructure or manage cryptographic keys. These wrappers maintained custody of underlying assets while providing exposure to DeFi yields through traditional financial interfaces. The trade-offs were substantial—clients sacrificed the non-custodial security model that made DeFi attractive in the first place—but the accessibility benefits enabled participation from investor segments that direct DeFi interaction would have excluded.

Hybrid structure mechanics

The typical hybrid model operated through several coordinated components. A regulated entity served as the legal wrapper, holding any necessary licenses and providing the regulatory interface for the operation. This entity established one or more smart contract interfaces—either directly on permissionless protocols or through agreements with protocol development teams—that executed the actual lending activities. Capital flowed from institutional investors into the legal wrapper, which deployed that capital through the smart contract interface while maintaining the accounting, reporting, and compliance infrastructure that institutional operations required. Profits and losses flowed back through this structure, with the regulated entity typically taking a fee or spread that reflected the value of the wrapper services provided.

This architecture created market segments with genuinely different characteristics. The permissionless layer continued to offer higher yields and greater volatility, attracting DeFi-native participants comfortable with smart contract risk and regulatory ambiguity. The permissioned layer provided lower yields with reduced volatility and clear regulatory status, attracting institutional participants who valued predictability and compliance over return maximization. The coexistence of these layers created opportunities for arbitrage and hedging that sophisticated participants could exploit, while also reducing some of the inefficiencies that had characterized earlier, less integrated markets.

Liquidity Comparison: DeFi Yields Versus Traditional Credit Markets

DeFi lending yields reflected a complex combination of liquidity risk premiums, collateral efficiency gains, and structural factors that distinguished them from traditional credit market returns. Understanding these components was essential for meaningful comparison—not simply noting that DeFi rates were higher, but analyzing why they differed and what risks that differential actually represented.

The collateral efficiency available in DeFi lending created yield opportunities that traditional markets couldn’t match without accepting substantially different risk profiles. A DeFi user depositing volatile crypto assets could borrow against them at loan-to-value ratios that would be impossible in traditional finance, freeing capital that would otherwise remain locked in appreciated positions. The yield earned on the borrowed stablecoins, when netted against borrowing costs, could provide meaningful returns on the underlying crypto position without requiring the user to sell that position and trigger taxable events.

Traditional credit markets, even in their riskier segments, couldn’t offer comparable efficiency because they lacked the real-time liquidation mechanisms and transparent collateral monitoring that made high LTV lending feasible. The traditional alternative—selling crypto positions to access USD—created tax obligations and eliminated upside potential that the DeFi borrowing approach preserved.

Liquidity conditions on major DeFi lending platforms demonstrated remarkable resilience during normal market periods, with depth sufficient to absorb substantial trading activity without significant slippage. However, stressed market conditions revealed liquidity fragilities that traditional market infrastructure didn’t exhibit to the same degree. During periods of rapid price decline, DeFi lending markets could experience cascading liquidations that amplified price movements, creating feedback loops that didn’t exist in traditional markets with circuit breakers and trading halts. The absence of market makers with obligation to provide liquidity during stress periods meant that DeFi liquidity could evaporate precisely when it was most needed.

Governance Token Dynamics: Evolution of Protocol Incentive Structures

Governance tokens in major lending protocols evolved substantially from their original conception as speculative instruments toward more substantive utility functions that provided genuine value capture for holders. This evolution shifted the composition of token holder bases and changed the economic incentives that governed protocol participation, moving beyond simple voting power toward fee-sharing and insurance mechanisms that created tangible benefits beyond governance rights.

Early governance token models focused primarily on voting power and speculative appreciation, with holders participating in protocol governance without receiving direct economic benefits from protocol operation. This model created holder bases motivated primarily by potential token price appreciation rather than long-term protocol success, sometimes leading to governance outcomes that prioritized short-term token holder interests over protocol sustainability.

Fee-sharing mechanisms emerged as the primary evolution of governance token utility, with protocols implementing structures that distributed protocol revenues to token holders. These distributions—often structured as direct token emissions or claims on protocol fee streams—aligned holder incentives more closely with protocol success while creating sustainable demand that wasn’t purely speculative.

Governance token utility evolution

The progression of utility mechanisms followed a recognizable pattern across major protocols. Initial implementations offered staking rewards that distributed portion of protocol revenues to stakers, creating yield that supplemented governance value. More sophisticated implementations added insurance utility, with token staking required to access certain protocol features or to receive coverage against smart contract losses. This insurance function created genuine utility demand that correlated with protocol usage rather than purely speculative positioning.

The holder composition shift was significant. Pure speculators represented a smaller proportion of token holders as the utility value propositions solidified, with longer-term participants increasing their positions to capture fee-sharing and insurance benefits. This shift improved governance stability by reducing the voting power of participants with shortest time horizons, though it also created new centralization concerns as large stakers accumulated disproportionate influence over protocol direction.

The emergence of vote-escrowed models—where locking tokens for longer periods created proportionally greater voting power—further reinforced long-term alignment while creating liquidity trade-offs for token holders who needed flexibility. These models, borrowed from Curve Finance’s implementation, spread across multiple lending protocols as mechanisms for balancing short-term liquidity with long-term governance stability.

Emerging Protocols: Market Share Shifts and Competitive Positioning

Market share in decentralized lending shifted toward protocols that introduced genuine product innovation rather than those merely pursuing TVL accumulation through incentive emissions. The market matured enough that users and capital providers could distinguish between protocols offering sustainable value propositions and those buying growth through unsustainable token subsidies, with meaningful consequences for competitive positioning.

Auto-rebalancing mechanisms emerged as a significant innovation category, with protocols offering automated collateral management that reduced the active management burden that had limited DeFi lending adoption among less sophisticated participants. These systems monitored loan health continuously, automatically executing collateral swaps or position adjustments to maintain target risk parameters without requiring user intervention. The value proposition was accessibility—participants who wouldn’t or couldn’t actively manage lending positions could now participate with reduced monitoring requirements.

Structured product development represented another innovation vector, with protocols creating packaged exposures that combined lending with other DeFi activities to target specific risk-return profiles. These products could provide yield enhancement through vault strategies that automatically moved capital between lending and liquidity provision, or risk reduction through structures that hedged volatility exposure while maintaining yield. The complexity of these products created new risks, but for appropriate use cases they offered utility that simple lending couldn’t match.

Standout protocol mechanics

Specific protocols captured market share through distinct approaches. Morpho, built on top of existing lending pools, offered improved capital efficiency by matching borrowers and lenders at better rates than the underlying pools provided, capturing the spread between pool rates and optimized matching. This approach—layering innovation on proven infrastructure rather than building from scratch—proved attractive to users who valued the security validation that established protocols had already received.

Euler Finance introduced a novel approach to lending pool design that allowed for permissioned markets and more sophisticated interest rate models, attracting sophisticated users who found existing pool designs too limiting. The protocol’s emphasis on risk management features appealed to institutional participants seeking more granular control over their DeFi lending exposure.

Compound Finance’s continued development, including its Compound III iteration that introduced single-collateral pools with variable interest rates, demonstrated that established protocols could continue innovating rather than ceding ground to newer entrants. The protocol’s governance token and established brand provided competitive advantages that newer protocols needed to overcome through superior product features or incentive structures.

The common thread among gaining-share protocols was genuine product differentiation—offering capabilities or experiences that existing alternatives couldn’t match—rather than simply competing on yield. This maturation indicated a market developing the sophistication to evaluate protocol value propositions on their merits rather than aggregate TVL alone.

Conclusion: Strategic Positioning for the Next Phase of Decentralized Lending

Decentralized lending evolved from experimental infrastructure into a genuine alternative market that warranted portfolio allocation consideration rather than experimental position sizing. The developments across regulatory frameworks, institutional integration mechanisms, security practices, and protocol innovation collectively established foundations for continued growth that didn’t depend on speculative crypto market movements. Participants approaching this market needed frameworks that recognized its genuine utility while accounting for the risks that remained distinct from traditional finance.

The infrastructure supporting institutional participation matured substantially, with wrapper structures, custodial solutions, and hybrid models providing pathways for capital that regulatory constraints or operational requirements had previously excluded. This infrastructure wasn’t perfect—fees remained significant, complexity created its own risks, and regulatory uncertainty persisted in key jurisdictions—but it enabled participation scales that earlier periods couldn’t support. Institutions approaching DeFi lending allocation could now do so with operational and compliance frameworks that didn’t require building entirely new capabilities from scratch.

Risk assessment frameworks needed updating to reflect the evolved threat landscape. Smart contract vulnerabilities remained important, but the shift toward oracle manipulation and governance exploits required different analytical approaches. Participants needed to evaluate oracle security, governance mechanisms, and upgrade timelocks alongside code audit quality when assessing protocol risk. The emergence of insurance products provided additional risk management tools, though coverage limitations and moral hazard considerations required careful evaluation.

Action-oriented takeaways for market participants

Position sizing in decentralized lending should reflect the asset class’s distinctive risk-return profile rather than treating it as equivalent to traditional fixed income. Collateral efficiency gains created value that traditional alternatives couldn’t match, but that efficiency came with corresponding risks around liquidation dynamics and market structure. Portfolio construction should consider the correlation properties between DeFi lending returns and traditional asset classes, which had shown limited correlation during normal periods but could exhibit stress correlation during market dislocations.

Due diligence processes needed protocols with demonstrated security track records, clear governance structures, and transparent operational practices. The market had matured enough that participants could evaluate these factors systematically rather than relying solely on TVL or token price performance. Protocols that invested in security infrastructure, governance reforms, and operational transparency deserved preference over alternatives that prioritized growth metrics without corresponding operational maturity.

Regulatory positioning required attention as the landscape continued developing. Jurisdictional advantages established during the current regulatory environment might shift as frameworks evolved, making flexibility regarding geographic exposure valuable. Participants with capacity to operate across multiple jurisdictions held advantages over those constrained to single jurisdictions as regulatory approaches diverged.

FAQ: Common Questions About Decentralized Lending Platform Trends

What minimum capital is required to participate effectively in DeFi lending markets?

DeFi lending markets offer accessibility advantages over traditional alternatives, with no practical minimum investment beyond transaction costs that vary significantly by chain. Ethereum mainnet transactions can be expensive during periods of network congestion, making smaller positions economically impractical, while Layer 2 solutions and alternative chains offer substantially lower transaction costs. For positions above several thousand dollars equivalent, transaction costs typically represent manageable fractions of expected returns across most chains and protocols.

How do DeFi lending protocols handle loan defaults and collateral liquidation?

Automated liquidation mechanisms execute when loan health ratios fall below defined thresholds, typically triggered by collateral value declining or borrowed value increasing relative to posted collateral. These liquidations occur through smart contract execution that sells collateral to repay portions of the loan, with varying discount rates for liquidators who execute the liquidation. The automation ensures liquidation occurs rapidly without requiring manual intervention, though it can create significant losses for borrowers who experience liquidation during volatile price periods.

What tax implications should participants consider when engaging with DeFi lending?

Tax treatment varies significantly by jurisdiction but generally treats DeFi lending returns as taxable income when received, with collateral positions creating potential taxable events when sold or when loans are taken against them. The complexity of DeFi transactions—particularly across chains or involving multiple protocol interactions—creates record-keeping challenges that participants should address before engaging with significant capital. Consulting tax professionals with crypto-asset expertise became standard practice for participants with substantial DeFi activity.

Can DeFi lending yields sustainably exceed traditional market rates over extended periods?

DeFi lending yields reflected genuine efficiency advantages in collateral efficiency and intermediation costs that traditional finance couldn’t easily replicate, suggesting some yield premium might persist indefinitely. However, competition among protocols, the potential for traditional financial institutions to develop competing infrastructure, and regulatory developments that might compress yields all represented factors that could reduce the spread over time. The historical persistence of elevated yields didn’t guarantee their continuation, making yield sustainability a legitimate consideration for longer-term positioning.

What happens to DeFi lending positions during periods of network congestion or chain instability?

Network congestion could delay transaction execution, creating practical challenges for users attempting to adjust positions or respond to market movements. During severe congestion, transactions might fail or execute at unexpected prices, potentially causing losses for users who couldn’t manage positions proactively. Chain instability presented more serious risks, with potential for finality delays or (in extreme cases) chain reorganizations that could affect transaction validity. Users with significant DeFi lending exposure increasingly maintained exposure across multiple chains to reduce single-chain dependency risks.