DeFi Lending Shows Uneven Rebound as Markets Reevaluate Risk After Shock

Activity at Maple Finance, an onchain asset manager focused on institutional lending, has been rising since late April, when the company announced that every allocation across DeFi had been "proactively unwound," leaving it with no active lending positions across DeFi. 

"That was positively received by the market," Sidney Powell, co-founder and CEO of Maple, told Sandmark at the Consensus conference, in Miami.  

The company announced the closing of lending positions across DeFi on April 22, just a week after it was hit with $800mn in outflows, reflecting investors' fears of risk contagion following an exploit that targeted the KelpDAO protocol. Aave, the largest lending protocol by total value locked, according to DefiLlama data, was exposed to $200mn in bad debt that triggered a sharp contraction in liquidity. 

Total value supplied fell by about a third as lenders withdrew funds, while stablecoin borrowing costs rose from around 3%-4% to as high as 14%–15% as remaining liquidity was absorbed. Weeks later, that liquidity has yet to fully return to the protocol. 

"The more conservative you can be at bridging risk at the moment, like not accepting bridge collateral, you're going to get rewarded by the market in terms of TVL inflows," Powell said, adding that the incident put a question mark on whether bridged assets should be considered riskier than native assets when things go wrong. "This whole issue raised one of the questions of are bridged assets junior or pari passu (Latin for "on equal footing") with layer-one assets?" 

Bridged assets are tokens representing an asset transferred from one blockchain to another via a cross-chain bridge. Because they depend on the bridge security and design, they carry additional risk compared with native assets that do not rely on such mechanisms. In the case of KelpDAO, the exploit involved a compromised bridging system, which allowed attackers to drain nearly $300mn in wrapped collateral and left billions in associated liquidity effectively frozen across lending markets. 

Pricing adjusts to risk 

Powell characterised the episode as a turning point in how credit risk is priced in DeFi lending markets. 

Prior to the exploit, borrowers were able to access funding at rates below US Treasury yields, a dynamic he said did not reflect underlying risk. “Some borrowers were telling us that our prices were too high, and they could borrow from DeFi at 3.5%, 4%,” he said. “Post Kelp and the fallout from that issue, we have seen prices rewrite.” 

According to Powell, borrowers are refinancing out of DeFi venues in favour of structures offering stronger collateral protection. "They realized that part of the cheaper pricing, the tradeoff was you took more risk on your collateral," he said.  We've seen some refis come across to us."  

Structure under scrutiny 

Aave operates as a pooled lending protocol, in which liquidity is shared across users and risk is managed through collateral parameters and governance decisions. Maple, by contrast, intermediates credit through underwritten loans, typically backed by large-cap crypto collateral and subject to more controlled custody arrangements. 

The rebound has also reached DeFi protocols with different risk exposure mechanisms. Morpho, a protocol that matches lenders and borrowers through peer-to-peer markets rather than pooled liquidity, saw its TVL fully recover to $7.7bn since the incident, according to onchain data. 

Active loans across DeFi fell to $26.6bn in early May, down from $33.6bn in mid-April, before the KelpDAO hack. The hack and the resulting decline has intensified scrutiny among crypto lenders over whether returns in DeFi markets are mispriced relative to underlying risk.