Original Title: Disrupting the Cost Structure of Lending
Original Author: Stani.eth, Founder of AAVE
Original Translation: Ken, Chaincatcher
On-chain lending began around 2017, initially just a marginal experiment related to crypto assets. Today, it has evolved into a market exceeding $100 billion, primarily driven by stablecoin lending, using crypto-native collateral such as Ethereum, Bitcoin, and their derivatives as guarantees. Borrowers release liquidity through long positions, execute leveraged loops, and engage in yield arbitrage. The importance lies not in creativity, but in validation. Recent behavior shows that smart contract-based automation lending had genuine demand and true product-market fit long before institutions began to pay attention.
The crypto market remains volatile. Building lending systems on the most vibrant existing assets forces on-chain lending to address risk management, liquidation, and capital efficiency issues immediately, rather than hiding them behind policies or human discretion. Without crypto-native collateral, the true power of fully automated on-chain lending cannot be realized. The key is not the cryptocurrency as an asset class, but the cost structure changes brought by decentralized finance.
Why On-chain Lending is Cheaper
On-chain lending is cheap not because it is a new technology but because it eliminates layers of financial waste. Nowadays, borrowers can access stablecoins on-chain at around 5% cost, while centralized crypto lending institutions charge interest rates of 7% to 12%, plus fees, service charges, and various additional costs. When conditions favor borrowers, choosing centralized lending is not only unwise but even irrational.
This cost advantage does not come from subsidies but from capital aggregation in an open system. Permissionless markets are structurally superior to closed markets in capital gathering and risk pricing, as transparency, composability, and automation drive competition. Capital flows faster, idle liquidity is penalized, and inefficiencies are exposed in real-time. Innovation spreads immediately.
When new financial primitives come up, such as USDe from Ethena or Pendle, they absorb liquidity across the entire ecosystem and expand the use of existing financial primitives (like Aave) without the need for sales teams, reconciliation processes, or backend departments. The code replaces management costs. This is not just a progressive improvement; it is a fundamentally different operating model. The advantages of all cost structures will be transmitted to capital allocators, and more importantly, benefit borrowers.
Every major transformation in modern history has followed the same pattern. Heavy asset systems turn into light asset systems. Fixed costs become variable costs. Labor turns into software. Centralized economies of scale replace local duplicative construction. Excess capacity converts to dynamic utilization rates. Transformations appear terrible at first. They serve non-core users (such as crypto lending rather than mainstream use cases), competing on price before improving quality, and they seem unserious until scaling expands and existing institutions are unable to cope.
On-chain lending fits this pattern perfectly. Early users are mostly niche cryptocurrency holders. The user experience is poor. Wallets feel unfamiliar. Stablecoins do not touch bank accounts. But none of this matters because it’s cheaper, faster, and access is global. As everything else improves, it becomes easier to access.
What Comes Next
During bear markets, demand drops, yields compress, revealing a more significant dynamic. Capital in on-chain lending is always in competitive state. Liquidity does not stagnate due to quarterly committee decisions or balance sheet assumptions. It is continuously repriced in a transparent environment. Few financial systems are as ruthless as this.
On-chain lending is not lacking in capital, but rather in collateral available for lending. Most on-chain lending today merely cycles the same collateral for the same strategies. This is not a structural limitation but a temporary one.
Cryptocurrency will continue to generate native assets, productive primitives, and on-chain economic activity, thus expanding the coverage of lending. Ethereum is maturing into a programmable economic resource. Bitcoin is solidifying its role as an economic energy store. Neither are the ultimate state.
If on-chain lending is to reach billions of users, it must absorb real economic value and not just abstract financial concepts. The future lies in autonomously combining crypto-native assets with tokenized real-world rights and obligations, not to replicate traditional finance but to operate it at extremely low costs. This will become a catalyst for replacing the old financial backend with decentralized finance.
Where Lending Really Went Wrong
The reason lending is expensive today is not due to capital scarcity. Capital is abundant. The clearing rate for quality capital is 5% to 7%. The clearing rate for risk capital is 8% to 12%. Borrowers still pay high-interest rates because everything around capital is inefficient.
The loan issuance process has become bloated due to customer acquisition costs and lagging credit models. Dual approval leads quality borrowers to pay excessively while low-quality borrowers receive subsidies until default. Service processes remain manual, compliance-heavy, and slow. Incentive mechanisms at every layer are misaligned. Those pricing risk rarely take on actual risk. Brokers bear no default liability. Loan originators immediately sell risk exposure. Regardless of the outcome, everyone gets paid. The defects in the feedback mechanism are the real costs of loans.
Lending has not been disrupted because trust supersedes user experience, regulation restricts innovation, and losses mask inefficiencies before they explode. Once a lending system collapses, the consequences are often disastrous, reinforcing conservatism rather than progress. Thus, lending still appears as an industrial-age product crudely stitched onto digital capital markets.
Breaking the Cost Structure
Unless loan issuance, risk assessment, service, and capital allocation fully achieve software native and on-chain integration, borrowers will continue to pay excessive fees while lenders will rationalize these costs. The solution is not more regulation or marginal improvements to user experiences. Instead, it is about breaking the cost structure. Automation replaces processes. Transparency replaces discretion. Certainty replaces reconciliation. This is the disruption decentralized finance can bring to lending.
When on-chain lending becomes significantly cheaper than traditional lending in end-to-end operations, ubiquity is not a problem but a foregone conclusion. Aave was born in this context, capable of serving as a foundational capital layer for a new type of financial backend that services the entire lending spectrum from fintech companies to institutional lenders to consumers.
Lending will become the most empowering financial product simply because the cost structure of decentralized finance will allow rapidly flowing capital to enter applications that need capital the most. Abundant capital will spawn numerous opportunities.
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