Curve Finance recorded a 68% increase in active loans during the third quarter of 2026, with outstanding lending activity reaching $70.9 million. The increase surpasses the protocol’s closing balance for 2025 and comes as the broader decentralized finance (DeFi) lending sector recovers at a slower pace, with total DeFi lending still below its 2025 benchmark at the close of September.

Active loans on Curve Finance rose from $42.18 million on June 30 to $70.9 million by September 30. Approximately 84% of the increase is attributed to LlamaLend v2, a lending protocol that expanded to Optimism in June and the Ethereum mainnet in July. August delivered the strongest growth within Curve’s lending business, driven by markets featuring yield-bearing stablecoins such as sreUSD, sfrxUSD, and syrupUSDC.

Yield-Bearing Collateral at the Center

According to the Curve Finance team, the quarterly loan growth reflects borrowers seeking credit while keeping the income generated by their collateral. “DeFi lending is recovering unevenly. Capital is moving toward places where assets can continue earning yield while used as collateral,” a statement from Curve Finance indicated. LlamaLend v2 broadens the options available to token issuers, who can create lending markets for their assets and let borrowers pledge holdings as collateral without forfeiting the underlying yield.

Under the updated LlamaLend v2 design, a lending pair no longer requires crvUSD as either the collateral or the borrowed asset. Issuers can build markets around other supported assets and earn fees from those markets. When LlamaLend v2 first launched on Optimism, it introduced isolated markets for ETH against wstETH, wstETH against USDC, and WBTC against USDC. Borrowing caps were set to zero at launch, allowing deposits before borrowing received governance approval.

Proposed Market for Liquidity Pool Tokens

Looking ahead to the fourth quarter, Curve anticipates further LlamaLend v2 market launches, supported by demand from asset issuers. One notable proposal involves a market that would accept a reUSD/sfrxUSD liquidity provider token as collateral. If approved, holders would be able to borrow against their LP tokens without withdrawing assets from the underlying pool, extending borrowing access specifically to holders of that pool position. The proposal is pending a vote by the Curve DAO.

Borrowers in these markets can receive incentives paid in CRV, in addition to the collateral’s existing income, and asset issuers can direct rewards toward selected markets to make borrowing more attractive. For U.S. participants, the Internal Revenue Service states that digital asset rewards are taxable income and that taxpayers must keep records of receipts and their dollar values. The IRS also instructs taxpayers to answer “yes” to the federal return’s digital asset question if they receive tokens as rewards or awards.

Gradual Liquidation Mechanism

Curve’s LlamaLend protocol uses a liquidation range mechanism rather than a single liquidation price to manage borrowers facing falling collateral values. Borrowers can select their leverage and the width of the range over which collateral gradually converts into the borrowed asset, meaning a sudden price decline does not necessarily close the entire loan immediately. Curve has linked the performance of its LLAMMA liquidation mechanism to transaction execution on Ethereum, suggesting that cheaper, faster arbitrage could help the mechanism track market prices as collateral moves through its liquidation range.

Curve DAO has also assigned lending oversight to yRisk. In September, yRisk received a twelve-month mandate to review collateral, liquidity, oracle design, concentration, and governance risks for crvUSD and LlamaLend. The provider can recommend debt ceilings and market settings, but final decision-making authority rests with Curve governance and its emergency DAO. yRisk will receive 125,000 frxUSD and 568,181 CRV through separate, revocable vesting streams over one year.

The growth underscores a broader pattern in DeFi lending, in which capital is drawn to platforms that allow assets to keep generating yield while serving as collateral. This focus on yield-bearing collateral reflects a maturing DeFi lending market adapting to user demand for both borrowing capacity and ongoing income generation. The expansion of LlamaLend v2 and the exploration of new market structures, such as the proposed LP token market, point to continued innovation in how DeFi lending protocols are designed and utilized. The proposed reUSD/sfrxUSD liquidity pool token market, if approved by the Curve DAO, could pave the way for similar mechanisms that let users borrow against liquidity positions more effectively.

Source: crypto.news