Lending agreements are the biggest winners in the on-chain credit value chain

Is DeFi lending really that unprofitable? The data makes it clear.

With the rise of vaults and strategy platforms in the DeFi ecosystem, many have begun to believe that the profit margins of lending protocols are being eroded. But from the perspective of the entire on-chain credit stack, the conclusion is quite the opposite: lending protocols are the strongest value capturers along this value chain.

Phenomenon: Income comparison between vaults and lending protocols

Taking Ether.fi’s ETH liquidity staking strategy as an example, which is the second-largest borrower on Aave:

Ether.fi’s operational logic:

• Users deposit weETH (yield approximately +2.9%)
• Vaults lend out wETH (cost approximately -2%)
• Vaults charge a 0.5% management fee on TVL

On the surface, Ether.fi appears to capture value. But a deeper look at the data reveals a completely different picture:

Actual income comparison:

• Ether.fi’s net liquidity deployed on Aave is about $215 million
• Annualized management fee income: approximately $1.07 million
• Annualized interest paid to Aave: approximately $4.5 million

Key figure: $4.5 million vs. $1.07 million — the value that lending protocols extract from a single vault is more than four times the vault’s own income.

Even when considering the combined income from vault strategies and the revenue of the weETH issuer, Aave’s captured economic value remains higher.

Consistent conclusions from multiple cases

Fluid Lite ETH:

• Charges 20% performance fee + 0.05% withdrawal fee
• Borrows $1.7 billion wETH from Aave
• Annual interest payments: about $33 million
• Aave’s earnings: about $5 million
• Fluid’s own income: close to $4 million

Mellow protocol’s strETH:

• Charges 10% performance fee
• Borrowing scale: $165 million, with actual TVL only $37 million
• Interest paid to lending protocols far exceeds its own income

Treehouse on SparkLend:

• TVL about $34 million, borrows $133 million
• Only charges performance fees on the marginal yield exceeding 2.6%
• In terms of TVL, SparkLend’s value capture ability surpasses that of vaults

Pattern recognition: Whether it’s Mellow, Fluid, or Ether.fi, the value that lending protocols extract consistently exceeds that of the vaults themselves — this is no coincidence.

Analysis of the value chain structure

Why does this phenomenon occur? It’s essential to understand the roles of each link in the entire on-chain credit stack:

Annualized revenue from lending markets exceeds $100 million, created collectively by:

• Lending protocols: Provide liquidity matching and risk management, charging interest to borrowers
• Users and vaults: Capital providers, earning interest income
• Asset issuers (like Lido, Ether.fi): Provide underlying assets, indirectly participating in revenue sharing
• Vaults and strategy platforms: Connect with users and complex strategies, charging management or performance fees
• Blockchain networks: Provide the underlying settlement infrastructure

Key insight: Vaults’ pricing structures significantly impact their own income, but the revenue of lending protocols mainly depends on the nominal scale of borrowing, which is relatively more stable. No matter how vaults adjust their fees, lending protocols can earn a steady stream of interest from each loan.

Who makes more money — lending protocols or asset issuers?

Should you choose Aave or Lido? This question involves the overall economic model of the asset issuers.

Lido has about $4.42 billion in assets supporting borrowing positions in the Ethereum core market:

• Annualized performance fee income: about $11 million
• Indirect earnings from lending markets (net spread 0.4%): about $17 million
• Total: approximately $28 million

In contrast, Aave’s interest income from these positions is already significantly higher than Lido’s direct earnings. In an environment where lending rates rise, this gap will further widen.

The true moat of lending protocols

From a traditional finance perspective, DeFi lending protocols might be seen as a thin-margin industry. But this judgment overlooks where the real moat lies.

Within the entire on-chain credit system:

• The value captured by lending protocols exceeds that of downstream vaults and distribution layers
• It also surpasses upstream asset issuers
• Vaults, strategy platforms, and asset issuers all rely on lending protocols to complete their cycle strategies

Individually, it may seem like a thin-margin business, but when viewed across the entire credit stack, lending protocols have the strongest value capture ability compared to all other participants — including Mellow, Ether.fi, Fluid vaults, and Lido.

This is the essence of the lending protocol’s moat: not necessarily high profits in absolute terms, but a relative advantage within the entire value chain.