Jack Paul 
New data from Galaxy Research shows the crypto-backed lending market is still shrinking. Total outstanding loans fell to $56.16 billion in the second quarter, down 16.78% from the previous quarter. That puts the market roughly 40% below the $78.69 billion peak reached in the third quarter of 2025.
DeFi and CeFi are moving apart
The decline was not spread evenly. Decentralized finance lending dropped 27.61% quarter over quarter to $20.43 billion. Centralized finance lending fell by a smaller 9.62% to $22.98 billion. As a result, CeFi now has more lending volume than DeFi for the first time since the third quarter of 2023.
That reversal is worth paying attention to. DeFi was the growth story in crypto lending for a while. The latest numbers, though, point to a shift in preference. Borrowers and lenders seem to be moving toward platforms with clearer rules and custodial protections, even if DeFi still has technical advantages.
An orderly pullback, for now
The report also highlights how calm this pullback has been. The last three quarterly declines were around 10%, 5%, and 17%. In 2022, the market saw a single-quarter drop of more than 55%. So while volumes are falling, this is not a panic.
That could mean a few things. Market participants are likely more cautious. Macro uncertainty and tighter risk management probably play a role. Institutions may also be more selective about where they put capital. The fact that CeFi is doing better than DeFi in relative terms fits with that reading, since centralized platforms tend to offer more familiar legal and operational structures.
What to watch in the coming months
Lower lending volumes mean less borrowed money across crypto markets. That can reduce the risk of cascading liquidations, but it can also make trading conditions less liquid. Protocols and lenders that depend on borrowing activity may feel the squeeze.
Still, the orderly nature of the decline offers some reassurance. The market is recalibrating, not collapsing. Whether that continues depends on demand. If borrowing costs stay high or risk appetite remains weak, the slide could continue. If conditions improve, lending could stabilize near current levels.
For now, the data points to a more careful market. The shift toward CeFi is notable, but it is still early. The third quarter will show whether this is a temporary adjustment or a longer-term change in crypto lending.