Abstract
Decentralised finance (DeFi) lending platforms have grown rapidly in recent years, yet the reasons why investors participate in these platforms remain largely unclear. In this study, we use detailed, transaction-level data from Aave, one of the leading DeFi lending protocols, to investigate these motivations.
Our theoretical and empirical findings show that liquidity provision in DeFi lending pools is mainly driven by the search for yield. On the other hand, borrowing activity is primarily motivated by speculative opportunities and, to a lesser extent, governance considerations.
Both retail and large investors aim to earn high returns through market fluctuations and price speculation. However, large investors borrow in DeFi more frequently than retail users to gain influence over protocol governance and to acquire more significant voting rights.
Introduction
Decentralised finance (DeFi) lending refers to the process of borrowing and lending assets directly through blockchain technology and smart contracts, bypassing traditional banks and financial intermediaries.
Participants in this system can lend or borrow funds in a trustless environment, relying on blockchain’s transparency and immutability. Interest rates are determined algorithmically based on supply and demand within the platform.
DeFi lending has grown tremendously, reaching a peak total value locked (TVL) of over $50 billion during the strong market conditions of early 2022, starting from nearly zero at the end of 2020 (Aramonte et al., 2022).
DeFi lending differs from traditional banking in three main ways. First, it operates anonymously, without the need for personal identification or credit checks.
Unlike conventional banks, which heavily rely on assessing borrowers’ creditworthiness, DeFi participants interact without revealing their identities.
Second, crypto assets play a central role as collateral. Because borrowers remain anonymous and cryptocurrencies are highly volatile, DeFi lending relies on overcollateralisation to manage risk.
In contrast, traditional banks often provide undercollateralised loans or accept a wider range of collateral, such as property or personal assets.
The dependence on crypto assets makes DeFi largely self-contained and limits its connection to the broader real economy.
Third, automation through smart contracts is central to DeFi. Smart contracts enable instant loan disbursement and reduced transaction costs, unlike traditional banks that involve manual processing and personal relationship management.
While this enhances efficiency, it eliminates trust-based interactions that help in risk assessment and loan recovery in traditional finance. DeFi lending protocols essentially act as automated credit intermediaries, funding borrowers who remain anonymous to the platform.
Understanding the drivers of participation in DeFi lending is essential. While depositors are likely motivated by yield-seeking, the reasons for borrowing are less obvious. Given the requirement for overcollateralisation, it may seem counterintuitive that borrowing occurs at all.
In traditional finance, collateral is often illiquid, such as real estate, which could justify borrowing rather than liquidation. In DeFi, however, collateral is typically highly liquid, so borrowing motivations must be different.
This paper tests three hypotheses. First, we examine whether users deposit funds primarily to earn yield. Second, we explore whether borrowers engage in DeFi for speculation or to temporarily increase governance token stakes, thereby enhancing their voting power.
Third, we investigate differences between retail investors (small accounts) and large investors (large accounts) in both deposit and borrowing behaviour. To our knowledge, this is the first empirical study to examine these motivations in the DeFi lending context.
Our main findings are as follows. Yield-seeking is the primary reason users provide liquidity to DeFi pools, especially among retail participants.
Borrowing activity, however, is largely driven by speculative motives or the desire to increase governance influence, though speculation is generally more important.
Both retail and large investors borrow for speculative reasons, seeking higher returns through leverage and market movements. Large investors, however, borrow more than retail users to enhance governance participation and voting power.
This study contributes to several areas of research. First, it adds to the growing literature on DeFi lending, which notes that traditional lending practices, based on borrower reputation and financial strength, are not applicable in an anonymous environment (Chiu et al., 2022).
While prior studies assume lending pools function as intermediaries for project funding, our findings suggest DeFi lending is primarily used for trading and investment strategies, rather than financing projects.
Our results align with existing evidence that borrowing increases when the price of ETH rises. Similarly, Saengchote (2023) finds that DeFi users mainly borrow for leveraged investment strategies.
Heimbach and Huang (2024) show that highly active and large users tend to hold more leverage and prefer volatile collateral as their positions approach liquidation. Our work builds on these insights by exploring the motivations behind such high-risk behaviours.
Other research has focused on specific aspects of DeFi intermediation. Lehar and Parlour (2024) study liquidity pool stability, while Capponi and Jia (2025) examine inefficiencies in decentralised exchanges, such as arbitrage losses for liquidity providers.
Capponi et al. (2023c) show that just-in-time liquidity providers can crowd out passive liquidity providers under certain conditions, affecting overall market liquidity. Rivera et al. (2023) find that fixed interest rates in DeFi are less efficient compared to traditional lending, particularly under withdrawal shocks.
Barbon et al. (2023) study how U.S. monetary policy influences stablecoin lending on Aave, noting limited transmission of policy rates. Unlike these studies, we focus not on interest rates but on the motivations driving user behaviour, particularly the role of speculation in DeFi borrowing and lending decisions.
Finally, our study extends the “search for yield” literature, which examines how investors respond to low interest rates. Traditional studies show that banks and investment funds increase risk-taking when rates are low (Maddaloni and Peydró, 2011; Jiménez et al., 2014; Di Maggio and Kacperczyk, 2017).
Experiments by Chen et al. (2019) indicate that individuals prefer riskier assets when safe returns are low. Our findings suggest that low interest rates similarly incentivise individuals to deposit crypto in DeFi platforms to earn higher returns than conventional investments like bonds or stocks.
The remainder of this paper is organised as follows. Section 2 describes the dataset and stylised facts. Section 4 presents the empirical model and baseline results. Section 5 examines differences between large and retail investors. Section 6 reports robustness checks. Section 7 concludes.
Data and Stylised Facts
This study focuses on Aave activity on the Ethereum blockchain. The dataset contains transaction-level information on deposits and borrowings from Aave V2, spanning December 2020 (launch of Aave V2) to mid-July 2022.
DeFi Layers
DeFi consists of four main layers: blockchains, smart contracts, protocols, and DeFi applications (Dapps). Blockchain serves as a permissionless distributed ledger, while smart contracts enable functionality beyond simple token transfers.
Demand for Deposit Transactions
We begin by analysing the factors driving deposits in DeFi. Our first hypothesis states:
Hypothesis 1: Investors deposit funds in DeFi lending protocols primarily to earn yield.
To test this, we model the natural logarithm of each deposit transaction’s dollar value, considering user, reserve, and timestamp variables. Monetary policy indicators are also included to capture broader macroeconomic effects.
Large vs Retail Investors
We also explore how behaviours differ between small-scale (retail) and large-scale investors. Retail investors may shift funds to safer assets when interest rates rise, while large investors are more likely to pursue volatile crypto prices, yield opportunities, and market sentiment-driven gains.
For borrowing, large investors generally have sufficient capital to leverage positions and influence protocol governance.
Extending the Deposit Analysis
Between 26 April 2021 and 20 May 2022, Aave issued native Aave tokens to reward depositors. This incentive could influence deposit patterns, as users may have deposited more to earn these tokens. We account for such incentives in our analysis to ensure robustness of the yield-seeking conclusions.
Conclusions
This study investigates investor behaviour in DeFi lending using granular transaction data from Aave V2. Our key findings are:
- Search for yield is the primary driver of liquidity provision in DeFi, particularly among retail investors, amplified by prolonged low-interest environments.
- Borrowing activity is mainly speculative or governance-driven, though speculation is the dominant motive.
- Large investors borrow more than retail investors for governance purposes, seeking influence over protocol decisions and increased voting power.
Overall, this study sheds light on the economic motivations behind DeFi lending, providing a deeper understanding of how and why participants engage with these rapidly growing platforms.
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