Decentralised finance (DeFi) lending platforms have grown rapidly since around 2020. These platforms allow people to borrow and lend directly on the blockchain without traditional banks.
Using detailed transaction data, researchers have investigated how investors behave on these platforms.
They found that most people deposit money in DeFi lending pools because they are looking for higher returns or profits, especially small retail investors.
On the other hand, people mainly borrow for speculation – to make quick profits from price movements – and sometimes also to gain governance powers through voting, which is more common among large investors.
Overall, the evidence shows that DeFi platforms tend to move money from savers to speculators, rather than to people who are using it for productive business purposes.
What is DeFi Lending?
DeFi lending allows users to lend and borrow cryptocurrencies directly using smart contracts on blockchains like Ethereum. This system cuts out banks and middlemen. The interest rates are decided automatically based on supply and demand within the platform. Since there is no need for trust in another person or institution, the system relies on transparent blockchain code and heavy collateral requirements. Borrowers have to deposit more value than they borrow to protect against risk.
These platforms became extremely popular between 2020 and 2022. The total value locked (TVL) in DeFi lending platforms went from nearly zero to over $50 billion at its peak. However, very little is known about why people use these protocols in the first place.
Key Motivations of DeFi Users
A key study by Cornelli et al. (2024) examined data from Aave V2, one of the biggest DeFi lending protocols, revealing three important findings:
- Deposits are driven by search for yield
Retail investors especially are looking for better returns compared to traditional bank savings. When interest rates in the real economy are low, people are more likely to put money in DeFi pools to earn more from crypto yields. - Borrowing is mostly for speculation
Users borrow to speculate on crypto price movements. Some also borrow governance tokens to increase their voting rights temporarily during important platform proposals, which gives them more control in decision-making. - Large vs Retail Investors Behave Differently
Small investors (retail) focus mainly on earning interest. Large investors also chase yields, but less aggressively. On the borrowing side, both groups speculate, but large investors are much more likely to borrow for governance (voting) reasons.
Differences Between Traditional Finance and DeFi Lending
DeFi lending differs from normal finance in three big ways:
- Anonymity: Identity is hidden, and no credit checks are done.
- Collateral: The only way to reduce risk is by over-collateralisation using crypto assets.
- Automation: Everything runs through smart contracts without humans or customer service.
Because of this, DeFi lacks relationship-based trust. This forces borrowers to secure their loans with crypto that is worth more than what they borrow. Over-collateralisation becomes the main way to manage risks.
Evidence About Deposits
The study found that deposits go up when interest rates in the traditional economy go down. This proves that people are seeking higher returns from DeFi. The long period of low interest rates globally led many retail investors to look into crypto lending to get better returns.
Depositing crypto in DeFi protocols gives higher profits than normal bank accounts or bonds. Even though larger investors also chase these yields, the effect is much stronger among small investors.
Evidence About Borrowing
Borrowers show strong speculative behaviour. Many borrow in order to invest in a cryptocurrency they think will rise in value, instead of selling what they already have.
For example, if someone owns Ethereum and expects the price to rise, they might use it as collateral, borrow stablecoins, and buy more Ethereum. If the price goes up, they earn more. This is a way of using leverage to increase profit potential.
Governance is another motive. Some tokens give voting rights on platform developments. Large investors often borrow these tokens during voting periods to increase their influence, even if just temporarily. However, speculation remains the stronger motive overall, especially across all investor types.
Large vs Retail Behaviour
Retail investors are much more sensitive to interest rates and will move their money out of DeFi once bank rates go up.
Large investors are less sensitive to these movements. They have more funds, take bigger risks, and are more focused on making gains through advanced strategies and governance influence.
On borrowing behaviour, both groups speculate, but large investors borrow more for voting power in development proposals. This is logical because bigger investors can meaningfully influence votes.
Overall Conclusions
- The main reason people deposit in DeFi lending pools is to earn higher yields, especially when traditional interest rates are low.
- The main reason people borrow is speculation, followed by voting power motives.
- Retail investors focus mostly on earning interest, while large investors use more complex strategies.
- DeFi seems to move money from people who want to save to people who want to speculate, not to people using it for real business projects.
Final Thoughts
DeFi lending has rapidly changed how people invest and borrow, offering opportunities but also concentrating activity around risky speculative behaviour.
The system rewards those who understand crypto price movements and token governance but does not necessarily support real-world productive investment.
This insight is important as DeFi continues to grow, and regulators, investors, and researchers should understand both the opportunities and risks involved.
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