From Payments to Global Credit

Stablecoins are rapidly evolving from simple crypto trading tools into a sophisticated financial infrastructure. While their role in modernizing payments—offering instant, 24/7 settlement for cross-border transactions—is a natural starting point, their true potential lies at the intersection of payments, lending, and capital markets. Financial giant Visa is now quietly exploring this next frontier: on-chain lending.

As stablecoins improve the efficiency of cross-border payments, they are also becoming the bedrock of an emerging global credit system. This system uses smart contracts to connect capital suppliers with borrowers worldwide, automating the entire lifecycle of a loan agreement. While the full integration of this “programmable money” into mainstream finance is still early, the underlying technology has been battle-tested in the Decentralized Finance (DeFi) ecosystem. Over the past five years alone, on-chain loans denominated in stablecoins have surpassed $670 billion in volume, demonstrating significant year-over-year growth.

Visa’s recent moves signal a growing recognition of this trend. The company’s announcement of a Visa Direct prefunding service using stablecoins is a prime example of how these digital assets are becoming embedded in real-world financial scenarios. In a research report, Visa explored how programmable money and smart contract-based protocols could create a more transparent, efficient, and accessible global lending ecosystem. This shift could be particularly impactful in regions like the Global South, where the demand for credit is largely unmet and stablecoin payment channels offer a powerful solution.

How On-Chain Lending Works

On-chain lending reshapes financial services by replacing traditional institutional intermediaries with automated smart contracts. It creates a global credit market that operates around the clock, allowing users to unlock liquidity by collateralizing their assets for use in both DeFi and traditional platforms.

The process is straightforward. Lenders deposit stablecoins like USDC or USDT into a lending pool managed by a smart contract, earning interest on their capital. Borrowers, in turn, must provide collateral—typically other crypto assets or tokenized real-world assets—which is locked in the smart contract to secure the loan. The smart contract handles everything that a traditional loan officer would, from calculating interest rates and monitoring collateral value to executing liquidation if the collateral ratio falls below a required threshold.

A New Model for Efficiency and Accessibility

This new model fundamentally changes how risk is managed and creates powerful efficiencies. Stablecoins provide a reliable value anchor for pricing and settlement, while smart contracts continuously monitor collateral and algorithmically adjust interest rates based on supply and demand. Rates fall when capital utilization is low and rise when liquidity tightens, ensuring market equilibrium.

The result is a highly accessible, 24/7 credit market where pricing is transparent to all participants. By removing traditional gatekeepers, on-chain lending allows anyone with an internet connection to borrow or lend capital, paving the way for a more inclusive and borderless financial future.

How On-Chain Lending Redefines Financial Risk

In traditional lending, managing counterparty risk relies on credit checks and legal contracts. On-chain lending fundamentally alters this dynamic by mitigating this specific risk through automated liquidation. Instead of trusting a borrower’s willingness to repay, the system trusts smart contract code to enforce the loan terms. This doesn’t eliminate risk but transforms it. While smart contracts can effectively manage counterparty risk, technical vulnerabilities become the new focal point. Lenders must shift their analysis from balance sheets to a protocol’s security audits, governance structure, and the reliability of its data sources.

The Two Faces of Crypto Lending: CeFi vs. DeFi

On-chain lending services are delivered through two primary channels: centralized finance (CeFi) and decentralized finance (DeFi). Each offers a distinct approach to crypto credit markets.

CeFi involves centralized financial institutions that provide crypto lending services, sometimes using on-chain infrastructure. These services often cater to institutional and accredited investors through several models. Over-the-counter (OTC) transactions allow borrowers and lenders to negotiate customized bilateral agreements, tailoring terms like interest rates and loan-to-value (LTV) ratios. Prime brokerage platforms offer a suite of services including margin financing, trade execution, and custody. Finally, on-chain private credit uses the blockchain as a crowdfunding and accounting layer to pool funds for off-chain credit opportunities, with debt often tokenized for investors.

DeFi, in contrast, consists of applications running on blockchains that are powered by self-executing smart contracts. These protocols allow users to borrow and lend crypto assets, earn yield, and access leverage for trading. DeFi lending is defined by its 24/7 accessibility, broad selection of assets, and radical transparency, as all transactions can be publicly audited. Common DeFi models include lending applications where users deposit collateral like BTC or ETH to borrow other assets under predetermined terms. Collateralized Debt Position (CDP) stablecoins are another popular mechanism, where users lock up collateral to generate a new, synthetic stablecoin. Some decentralized exchanges (DEXs) also offer margin trading services, providing leverage directly on the platform, though these funds typically can’t be withdrawn.

On-Chain Lending by the Numbers

The global on-chain lending market is expanding rapidly, demonstrating the significant scale of the stablecoin-driven credit market. In August 2025, the monthly loan volume reached an impressive $51.7 billion, with over 81,000 active borrowers participating.

Market Scale and Borrower Activity

The $51.7 billion in stablecoins loaned out in August 2025 brought the cumulative total since January 2020 to over $670 billion. The market saw a sharp decline from 2022 to early 2024 following the collapses of Terra, FTX, and several centralized crypto lenders. However, a strong recovery began in late 2024 and has pushed activity to new highs in recent months. This resurgence is mirrored in user metrics, with the number of loans hitting 427,000 from 81,000 unique borrower addresses in August 2025.

Platform and Asset Dominance

The market is heavily concentrated around a few key assets and platforms. USDC and USDT are the undisputed leaders, accounting for over 99% of the historical cumulative lending volume. In the previous market cycle, lending was spread across Ethereum, Avalanche, BSC, and Polygon. In the current cycle, Ethereum and Polygon have solidified their lead, capturing a combined 85% of volume in August 2025. Meanwhile, newer chains like Base, Arbitrum, and Solana are gaining traction, representing a combined 11% of the market. At the protocol level, incumbents Aave and Compound continue to dominate, handling 89% of monthly volume, while the newer protocol Morpho has grown its share to 4% after launching its V2 in June 2025.

Loan Metrics and Interest Rates

As the market recovered, so did the average loan size, rebounding to $121,000 in August 2025—a potential indicator of rising institutional demand. The total value of active loans and deposits has also surpassed previous peaks. An average of $17.5 billion in stablecoins was held in lending protocols during August 2025, with $14.8 billion, or 84%, actively loaned out. Interest rates fluctuate based on the price volatility of collateral like ETH and BTC, with borrower Annual Percentage Rates (APRs) ranging from under 2% to over 16%. In August 2025, the average loan APR stood at 6.4%, while the deposit Annual Percentage Yield (APY) was 5.1%, demonstrating that on-chain rates can remain competitive with traditional markets when backed by high-quality collateral.

The Evolution of Crypto Lending’s Major Players

The crypto lending landscape has been shaped by both pioneering DeFi protocols and major CeFi institutions. The period between 2022 and 2023 was particularly turbulent, as plunging asset prices and evaporating liquidity triggered the collapse of some of the largest CeFi lenders. Genesis, Celsius Network, BlockFi, and Voyager all filed for bankruptcy, causing the total size of the crypto lending market to fall an estimated 78% from its 2022 peak.

Many of these key players were established long before the 2020 DeFi boom. Genesis, founded in 2013, once handled $14.6 billion in loans. The on-chain giants Aave, MakerDAO (now Sky), and Compound Finance launched on Ethereum between 2017 and 2018, leveraging the smart contract capabilities introduced by the network in 2015. The end of the 2020-2021 bull run triggered an 18-month crisis for the lending markets, marked by the depegging of Terra’s UST stablecoin, the depegging of the stETH liquid staking token, and the Grayscale Bitcoin Trust (GBTC) trading at a significant discount to its net asset value.

The Foundations of a New Market

The evolution of on-chain lending represents a significant milestone in the maturation of digital asset infrastructure. Lending and borrowing have become a foundational pillar of both centralized and Decentralized Finance (DeFi), establishing a vital market mechanism that operates alongside the traditional financial system while introducing novel technological innovations.

The autonomous and algorithmic nature of this infrastructure creates a new paradigm for market operations. It functions continuously and transparently, implementing programmatic risk management that marks a significant breakthrough from legacy finance. This framework has the potential to dramatically increase efficiency and reduce the risks associated with intermediaries.

Innovations in Stablecoin Lending

A recent surge in stablecoin lending has unlocked new applications within on-chain finance. Protocols like Morpho are aggregating global liquidity through stablecoins to optimize lending markets. At the same time, new players are building on this foundation. Rain, a card issuer connected to stablecoins, is using platforms such as Credit Coop and Huma Finance to fund its credit programs. These platforms offer more than just card solutions; Credit Coop provides cash flow and income-based loans, while Huma uses stablecoins to enable more efficient trade finance and faster cross-border payments.

The Path Forward

Looking ahead, the on-chain lending market appears poised for a new phase of growth. This expansion will likely be characterized by more sophisticated risk management frameworks, increased institutional participation, and the development of clearer regulatory guidelines. The challenge will be for financial institutions to strike a delicate balance between regulatory compliance and the drive for innovative growth, while agile fintech companies continue to integrate new technologies to unlock greater value.