Leverage is quietly evolving in crypto markets — and it’s not going away, just shifting form.

According to Galaxy Research’s Q1 2025 report, total crypto-collateralized lending dropped 4.9% to $39.07B, marking the first decline since late 2023. But this isn’t a sign of deleveraging — it’s a structural reconfiguration.

In DeFi, borrowing plunged early in Q1 but bounced back strong, soaring over 30% by May. The comeback was fueled by Aave's integration of Pendle, a yield-bearing token enabling loans with up to 90% LTV. Ethereum-based DeFi drove most of the rebound.

In CeFi, lending rose 9.24% to $13.51B. Platforms like Tether, Ledn, and Two Prime led growth, but transparency remains low. Galaxy notes that off-balance-sheet activity and offshore desks may be hiding up to 50% more leverage than reported.

Meanwhile, Bitcoin treasury firms like MicroStrategy are loading up on debt. Total BTC-backed debt reached $12.7B, mostly set to mature by 2027–2028 — creating long-term credit risk embedded in the ecosystem.

On the derivatives front, CME open interest is rising (especially in ETH futures), showing growing institutional involvement. Retail leverage is also alive, as upstart Hyperliquid gains traction in perpetual futures.

The report warns: as DeFi, CeFi, and BTC treasuries become more interconnected, the market faces higher systemic risk. One weak point — a protocol exploit, a CeFi insolvency, or a treasury default — could ripple across all three layers.