Original Title: Why the DeFi Lending Moat is Bigger Than You Think

Original Author: Silvio, Crypto Researcher

Original Compilation: Dingdang, Odaily Planet Daily

As the market share of vaults and curators continues to rise in the DeFi world, the market has begun to question: Are lending protocols being squeezed on profit margins? Is lending no longer a good business?

But if we shift our perspective back to the entire on-chain credit value chain, the conclusion is quite the opposite. Lending protocols still occupy the most solid moat in this value chain. We can quantify this with data.

On Aave and SparkLend, the interest fees paid by vaults to lending protocols actually exceed the revenue generated by the vaults themselves. This fact directly challenges the mainstream narrative that “distribution is king.”

At least in the lending space, distribution is not king.

Simply put: Aave not only earns more than the various vaults built on top of it, but even exceeds the asset issuers used for lending, such as Lido and Ether.fi.

To understand why, we need to deconstruct the complete value chain of DeFi lending and re-examine the value capture capabilities of each role by following the flow of funds and fees.

Deconstructing the Lending Value Chain

The annualized revenue scale of the entire lending market has exceeded $100 million. This value is not generated by a single link but is composed of a complex set of stacks: the underlying settlement blockchain, asset issuers, capital lenders, the lending protocols themselves, and vaults responsible for distribution and strategy execution.

In previous articles, we have mentioned that a large portion of the current usage scenarios in the lending market originates from basis trading and liquidity mining opportunities, and we have deconstructed the main strategy logic.

So, who actually “demands” capital in the lending market?

I analyzed the top 50 wallet addresses on Aave and SparkLend and labeled the main borrowers.

1. The largest borrowers are various vaults and strategy platforms (also asset issuers) such as Fluid, Treehouse, Mellow, Ether.fi, and Lido. They possess distribution capabilities targeting end-users, helping users achieve higher returns without managing complex loops and risks themselves.

2. There are also large institutional capital providers, such as Abraxas Capital, deploying external capital into similar strategies, whose economic models are essentially very close to vaults.

But vaults are not the whole story. At least the following participants are included in this chain:

· Users: Deposit assets, hoping to obtain additional returns through vaults or strategy managers.

· Lending Protocols: Provide infrastructure and liquidity matching, generating protocol revenue by charging interest to the borrowing side and taking a certain percentage.

· Lenders: Capital suppliers, which could be ordinary users or other vaults.

· Asset Issuers: Most on-chain lending assets have underlying supported assets that generate returns, some of which are captured by the issuers.

· Blockchain Network: The underlying “track” where all activities occur.

Lending Protocols Earn More Than Downstream Vaults

Take Ether.fi’s ETH liquidity staking vault as an example. It is the second-largest borrower on Aave, with outstanding loan size of about $1.5 billion. The strategy itself is very typical:

· Deposit weETH (approx. +2.9%)

· Borrow wETH (approx. –2%)

· The vault charges a 0.5% platform management fee on TVL.

Of Ether.fi’s total TVL, approximately $215 million is the net liquidity actually deployed on Aave. This portion of TVL brings the vault about $1.07 million in platform fee revenue annually.

However, at the same time, this strategy pays Aave about $4.5 million in interest fees annually (calculation: $1.5 billion borrowing × 2% borrowing APY × 15% reserve factor).

Even in one of the largest and most successful loop strategies in DeFi, the value captured by the lending protocol is several times that of the vault.

Of course, Ether.fi is also the issuer of weETH, and this vault itself directly creates demand for weETH.

But even considering vault strategy returns + asset issuer returns together, the economic value created by the lending layer (Aave) is still higher.

In other words, lending protocols are the link with the largest incremental value in the entire stack.

We can perform the same analysis on other commonly used vaults:

Fluid Lite ETH: 20% performance fee + 0.05% exit fee, no platform management fee. Borrows $1.7 billion wETH from Aave, pays about $33 million in interest, of which about $5 million goes to Aave, while Fluid’s own revenue is close to $4 million.

Mellow protocol strETH charges a 10% performance fee, with a borrowing size of $165 million and TVL only about $37 million. Once again, in terms of TVL, Aave captures more value than the vault itself.

Let’s look at another example: on SparkLend, the second-largest lending protocol on Ethereum, Treehouse is one of the key participants, running an ETH loop strategy:

· TVL about $34 million

· Borrows $133 million

· Charges performance fees only on marginal returns above 2.6%

As a lending protocol, SparkLend’s value capture capability in terms of TVL is higher than that of vaults.

The pricing structure of vaults greatly affects their own capturable value; but for lending protocols, their revenue depends more on the nominal borrowing size, which is relatively stable.

Even shifting to USD-denominated strategies, although leverage is lower, higher interest rates often offset this impact. I do not believe the conclusion would fundamentally change.

In relatively closed markets, more value may flow to curators, such as Stakehouse Prime Vault (26% performance fee, incentives provided by Morpho). But this is not the final state of Morpho’s pricing mechanism, and curators themselves also engage in distribution collaborations with other platforms.

Lending Protocols vs. Asset Issuers

So the question arises: Is it better to be Aave or Lido?

This question is more complex than comparing vaults because staked assets not only generate returns themselves but also indirectly create stablecoin interest income for protocols through the lending market. We can only make approximate estimates.

Lido has about $4.42 billion in assets in the Ethereum core market used to support lending positions, with annualized performance fee revenue of about $11 million.

These positions roughly proportionally support ETH and stablecoin lending. At the current net interest margin (NIM) of about 0.4%, the corresponding lending revenue is about $17 million, already significantly higher than Lido’s direct revenue (and this is at historically low NIM levels).

The True Moat of Lending Protocols

If we only compare using the traditional financial deposit profit model, DeFi lending protocols might seem like a low-margin industry. But this comparison overlooks where the real moat lies.

In the on-chain credit system, the value captured by lending protocols exceeds that of the downstream distribution layer and, overall, exceeds that of upstream asset issuers.

Viewed in isolation, lending appears to be a thin-margin business; but placed within the complete credit stack, it is the layer with the strongest value capture capability relative to all other participants—vaults, issuers, and distribution channels.

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