Decentralized finance lending vaults now hold over $10 billion in total deposits, up from approximately $4 billion at the start of 2025. Institutional investors and treasuries are chasing double-digit yields on stablecoins and digital assets, driving the expansion.
But the sector faces mounting risks. Abdul Rafay Gadit, co-founder and chief commercial officer at Zigfinance, identified collateral reuse as the primary vulnerability for systemic failure. "A vault share can be borrowed against elsewhere, creating another layer of leverage on the same underlying assets," Gadit said.
This interconnectedness means if an asset's value or liquidity collapses, liquidations spread across connected markets. Different platforms can carry the same economic exposure, amplifying systemic risk. Regulators have placed the expanding sector in direct focus, and industry experts are urging platforms to implement robust risk controls proactively.
Gadit noted that growth in certain market segments outpaces development of crucial safeguards, specifically underwriting and liquidity. While tools like liquidations, oracles, and isolated markets offer control, their effectiveness hinges on accurate pricing, sound collateral, and the presence of buyers during market stress.
Current fee structures often exacerbate these risks by rewarding asset growth and high yields without enforcing accountability for potential losses, Gadit said.
Liquidity mismatch poses a secondary threat. Vaults that permit rapid withdrawals against private loans or locked positions risk depleting liquid reserves during sudden waves of exits, leaving remaining investors holding illiquid assets.
Zigfinance executives advocate for stricter risk management and Basel III-style capital buffers, along with financial compensation buffers to address security breaches or negligence.
