Crypto Leverage Landscape Shifts in Q1 2025 Amid Declining DeFi Lending and Rising Corporate Bitcoin Debt

Executive Summary

The first quarter of 2025 observed a notable rebalancing within the cryptocurrency leverage landscape, characterized by a contraction in crypto-collateralized lending, divergent performance between decentralized (DeFi) and centralized (CeFi) finance segments, and a continued increase in debt-fueled Bitcoin accumulation by corporate treasuries. Futures markets also underwent significant shifts, with institutional platforms gaining ground and perpetual exchanges experiencing rapid growth, albeit with evolving competitive dynamics. Overall market sentiment ranges from uncertain to high volatility expected, as new systemic risks emerge from the interplay of corporate debt and various leverage mechanisms.

The Event in Detail

Crypto-Collateralized Lending Dynamics

The crypto-collateralized lending sector experienced a 4.88% decline in open borrows during Q1 2025, settling at $39.07 billion. This marks the first quarterly contraction since Q3 2023. The decline was predominantly driven by DeFi lending applications, which saw a substantial 21.14% reduction, or $4.75 billion, in open borrows, reaching $17.7 billion. In contrast, CeFi lending venues increased their borrows by $1.14 billion, or 9.24%. Concurrently, the crypto-collateralized portion of collateral debt position (CDP) stablecoins expanded by $1.6 billion, a 25.56% increase.

However, Q2 2025 saw a strong rebound in onchain crypto-collateralized loans, which grew by 42% to an all-time high of $26.5 billion. By the end of Q2, DeFi lending applications represented 49.86% of the crypto-collateralized lending market, surpassing CeFi venues at 33.48% and CDP stablecoins at 16.65%.

Corporate Bitcoin Treasury Strategies

Bitcoin treasury companies added $2.1 billion in new debt during Q1 2025 specifically for Bitcoin purchases. Strategy (MicroStrategy), a prominent example, now carries over $8.2 billion in debt to support its Bitcoin treasury strategy. The company holds over 528,000 BTC, acquired at an average price of $67,458. Despite Bitcoin trading around $76,000, Strategy anticipated an unrealized loss of nearly $6 billion in Q1 2025. Facing $8 billion in total debt, $35 million in annual interest, and $150 million in dividends, the firm announced plans in March to raise $2.1 billion through a perpetual preferred stock offering with an 8% dividend to fund operations and further Bitcoin acquisitions.

While digital asset treasury companies (DATCOs) remained a focus in Q2, their reliance on non-debt-based strategies meant the outstanding debt for Bitcoin DATCOs remained unchanged. A market correction in September 2025 led to a 76% crash in Bitcoin purchases by corporate digital-asset treasuries, from 64,000 BTC in July to 12,600 BTC in August.

Futures Market Evolution

Futures open interest across major venues reached $115.97 billion by May 24, with significant growth observed in Ethereum (+7.95%) and Solana (+17.74%) futures. The institutional CME notably surpassed Binance in Bitcoin futures open interest by mid-2025, reaching $16.5 billion compared to Binance's $12.3 billion, signaling a shift towards regulated platforms. Total Bitcoin futures open interest across exchanges exceeded $70 billion in May, and Ethereum futures crossed $30 billion.

In the perpetual futures market, Hyperliquid experienced massive growth, with its open interest increasing by 175.33% to become the fourth-largest venue. By 2025, Hyperliquid's open interest reached $15 billion, a 359% year-on-year increase. It led the perpetual contract DEX market with a 73% market share by the end of Q1 2025. However, by September 2025, Hyperliquid's market share fell to 38% due to intense competition and the rapid rise of Aster DEX.

Stablecoin Borrow Rate Adjustments

Stablecoin borrow rates experienced a significant decline, falling from 11.59% to 5% in Q1 2025, primarily due to decreased market utilization and Aave's interest rate parameter updates. Onchain Bitcoin (BTC) and Ethereum (ETH) borrowing remained more cost-effective than over-the-counter (OTC) options. Aave later recommended setting the target borrow rate for most stablecoins to 6.50% to better align with market-priced interest rates. In Q2, the weighted average stablecoin borrow rate slightly increased from 4.7% on March 31 to 4.96% by July 31, while onchain USDC rates were observed to be 180 basis points below OTC rates by July 28, 2025.

Market Implications

The evolving crypto leverage landscape necessitates a re-evaluation of risk models and capital allocation strategies by market participants. The shift from DeFi to CeFi lending in Q1, followed by a DeFi rebound in Q2, alongside the emergence of new collateral types like Pendle on Aave, suggests a dynamic and adapting ecosystem. The rapid growth of platforms like Hyperliquid reflects evolving retail and sophisticated trader behavior in derivatives, indicating increased demand for high-performance trading venues.

The increasing accumulation of debt-fueled Bitcoin by corporate treasuries, exemplified by MicroStrategy's extensive borrowings, introduces new systemic risks to the crypto market. Financial institutions have warned that firms raising capital through convertible debt to acquire crypto are susceptible to forced selling during market stress, potentially creating dangerous feedback loops and depressing prices. The significant open interest in futures markets further suggests a potential for heightened volatility if market conditions shift rapidly. The interdependencies between different sources of leverage—CeFi, DeFi, corporate debt, and futures—mean that issues in one area could propagate across the entire ecosystem, leading to potential liquidation cascades and impacting overall market stability.

Expert Commentary

Galaxy Research's report highlights the inherent complexity and interdependencies within the crypto leverage market, noting both contractions and expansions across different segments. Experts have previously cautioned about the vulnerabilities of firms utilizing convertible debt instruments to acquire crypto assets, especially those designated as "Digital Asset Treasuries" (DATs) that may lack fundamental substance beyond financial engineering. Such strategies carry inherent risks of forced selling during periods of market stress, with potential cascading effects on investor confidence.

Broader Context

The shifts observed in the crypto leverage market underscore the increasing integration of digital assets with traditional finance and broader macroeconomic forces. A "risk-off" environment, driven by factors such as the Federal Reserve's hawkish stance on interest rates, can significantly impact crypto markets. The institutional migration towards regulated derivatives platforms like CME, surpassing unregulated venues in Bitcoin futures open interest, reflects a growing demand for compliance-focused infrastructure amidst heightened regulatory scrutiny. The U.S. CLARITY Act, classifying Bitcoin as a commodity, and the SEC's approval of spot Bitcoin ETFs, which attracted over $58 billion in assets under management by Q2 2025, have reduced legal ambiguity and enhanced liquidity, accelerating this institutional adoption. Derivatives now account for 77% of total cryptocurrency trading volume, indicating a structural shift towards more sophisticated financial instruments and regulated infrastructure. The emergence of "looping strategies" involving liquid staking tokens (LSTs) and liquid restaking tokens (LRTs) to gain leveraged exposure to Ethereum staking yields further illustrates the continuous financial innovation within the DeFi space, while also posing new considerations for risk management.