The report estimated that as of March 31, over $39 billion in crypto-collateralized debt was outstanding across decentralized lending apps, centralized lenders, and crypto-backed stablecoin issuers.
DeFi protocols accounted for 45.3% of the total, centralized venues accounted for 34.6%, and collateralized stablecoins accounted for 20.1%.
According to the report, many centralized desks raise short-term liquidity on DeFi rails, then lend the funds off-chain.
This duplication causes the same debt obligation to appear in both on-chain data and private ledgers, artificially inflating headline borrowing figures and complicating real-time risk assessments during market stress.
Sharp price declines often trigger automated liquidations on DeFi platforms first, as smart contracts enforce margin rules without delay.
Centralized desks that borrowed from DeFi may then respond by recalling loans or liquidating client collateral on exchanges, further pressuring prices.
Pendle tokens exhibited this reflexivity during the second quarter. After Aave enabled high loan-to-value collateral, users deposited nearly $1.4 billion and borrowed stablecoins, driving total DeFi supply above $54 billion by May 26.
If prices fall, mass liquidations could cascade back to centralized desks with mirrored exposures.
Meanwhile, corporate treasuries have added another credit layer to the system.
Strategy alone owes $8.2 billion and pays $17.5 million in quarterly interest. Most notes mature between mid-2027 and late-2028, creating a refinancing hump that coincides with debt carried by peers pursuing similar treasury policies.
To manage short-term obligations, many firms rely on OTC stablecoin loans, typically priced 2% to 4% above prevailing DeFi rates. The narrow spread indicates that centralized desks are actively benchmarking against DeFi, linking private credit costs to on-chain conditions.
When DeFi rates shift, OTC borrowing costs quickly adjust, tightening margin requirements for treasury borrowers and other participants.
Galaxy concluded that while the diversification of credit channels has increased borrowing capacity, it has also strengthened the transmission of shocks across the system.
In the absence of standardized disclosures or on-chain attribution for entity-level exposures, both regulators and market participants remain in the dark about the full scope of risk embedded in crypto credit markets.
