Wall Street without the banks: how DeFi runs $551 billion in loans, and where the real risks are hidden

A parallel financial system running on public blockchains has long since outgrown its origins as an experiment for crypto enthusiasts. Over the past few years, it has developed its own credit markets, analogues of deposit products, short-term financing mechanisms, tokenized versions of U.S. Treasuries, and even institutional lending funds. The foundation of all this infrastructure is stablecoins — digital tokens whose value is pegged to the dollar.

Since 2020, more than $551.7 billion in loans has moved through these systems. And while on the surface it looks like the birth of a new financial era, a closer look tells a different story: a significant share of the activity has nothing to do with financing real businesses or the broader economy, and everything to do with building up speculative positions inside the crypto market itself.

The defining feature of all this is that nearly the entire system runs in public view. Every transaction, every loan, every liquidation of a position is permanently recorded on the blockchain and can be viewed in real time. In traditional finance, this kind of transparency is virtually impossible.

GetBlock AML Research examines how this new economic system operates in parallel with traditional finance — and what risks it carries.

Digital dollars: how the USDT and USDC stablecoins work

USDT and USDC remain the largest stablecoins today. Their combined supply has reached roughly $270 billion. Most of these funds are parked in short-term U.S. Treasuries, generating billions of dollars in profit for the issuers.

By analysts' estimates, the income from holding USDT and USDC reserves alone comes to around $12.2 billion a year. That profit stays with the issuing companies — none of it is passed on to ordinary token holders.

Once digital dollars land on the blockchain, new financial instruments start being built on top of them. And that's where things get really interesting.

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Pendle and tokenized Treasuries: bond analogues on the blockchain

One example is the Pendle protocol. Its mechanics resemble the methods major investment banks have used in the traditional bond market since the 1980s. The system splits an asset into two parts: its principal value and its future yield. The result is a token that behaves almost like a U.S. Treasury bond.

An investor buys it for less than a dollar, and on the maturity date automatically receives exactly one dollar. As of this writing, the market for these instruments has reached about $230 billion, with more than $84 million flowing in over a single month.

The key difference from traditional finance is the speed of the system. In conventional banking, transactions like these can require intermediaries, clearinghouses, and several business days to settle. On the blockchain, the entire operation executes automatically through a smart contract.

Aave, Compound, Spark: lending platforms with no banks and no employees

The largest DeFi protocols — Aave, Compound, and Spark — operate like fully automated pawnshops. A user pledges cryptocurrency as collateral and receives a loan in return. Decisions are made not by bank employees but by code. If the value of the collateral drops too far, the system automatically sells the assets to repay the debt.

More than $551.7 billion in cumulative borrowings has already moved through these platforms, with the number of unique participants approaching 865,000 wallets. But there is an important caveat: the overwhelming majority of these loans have nothing to do with financing the real economy.

Roughly 41.4% of all loans are backed by Bitcoin or Ethereum. In other words, crypto holders are using their assets as collateral to borrow more crypto and amplify their potential gains from a rising market. Another 32.2% of the activity involves loans where one stablecoin is used to borrow another.

The "DeFi money multiplier": why $41.8 billion may be an illusion

At first glance, the DeFi numbers look impressive. One crypto "savings" product, for example, drew in $41.8 billion over 90 days.

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But a closer analysis revealed that around 80% of that volume was generated by internal operations within the protocol itself — not by actual users.

The same money was repeatedly moved between connected services and counted as new volume at each step. A single dollar could pass through a lending protocol, then through a deposit system, then be used as collateral on another platform — and each time it would show up in the statistics as a separate transaction.

Researchers call this the "DeFi money multiplier."

DeFi composability: why protocols work like building blocks

Almost every instrument in DeFi has an analogue in traditional finance. There are ordinary loans secured by securities, repo markets, fixed-income bonds, and money market funds.

But in the classic financial system, all of these products sit in different institutions and operate independently of one another. On the blockchain, things work differently. Here, financial instruments can interact automatically with one another.

A user can, for example, deposit funds into one protocol, receive a deposit token, use it as collateral for a new loan, and then use the borrowed money to buy tokenized U.S. Treasuries. The entire chain of operations can be completed in a matter of seconds. This interconnectedness is considered one of DeFi's most revolutionary features — and at the same time, one of its biggest sources of risk.

Automated liquidations: how bots can trigger a market crash

When the market starts dropping sharply, the system triggers automatic sales of collateral. In traditional finance, situations like these typically involve bank employees, risk managers, and special debt restructuring procedures. In DeFi, this is handled by code.

If asset prices fall too quickly, specialized bots automatically liquidate thousands of positions almost simultaneously. This can set off a chain reaction of crashes with no human involvement.

Scenarios like these have already played out during the crises of March 2020 and May 2022. The system managed to recover in both cases, but analysts stress that the mechanics of these crises are fundamentally different from anything that has previously existed in traditional finance.

Blockchain transparency: lessons from the 2008 crisis for DeFi

One of the most unusual features of the new financial system is its openness. The Maple Finance platform, for instance, has come to resemble a full-fledged institutional credit fund. It has roughly $3.8 billion under management, with active loans exceeding $1.2 billion.

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In traditional finance, information about the loan portfolios of such funds is typically strictly confidential. On the blockchain, anyone can see the dates loans were issued, the interest rates, the loan sizes, and the repayment history.

Analysts point out that in the lead-up to the 2008 crisis, most of the risks were hidden deep inside the banking system. Very few people understood the actual scale of the problem.

The situation today is different: the blockchain allows risk to be observed as it accumulates, practically in real time. But transparency alone does not eliminate the problems of excessive leverage, speculation, and the interconnectedness of financial instruments.

DeFi in 2026: syncing up with traditional finance

In 2026, rates inside DeFi have started moving almost in sync with traditional credit markets. That means blockchain finance is gradually becoming part of the global financial system rather than a standalone experiment by crypto enthusiasts. But the central question remains open: can this infrastructure withstand a genuine, large-scale crisis?

Billions of dollars are already moving through systems where most processes run automatically and operations are measured in seconds. And while this entire financial machine operates in plain sight, it is far from certain that the market truly grasps the scale of the risks building up inside it.