DeFi Yields Have Been Declining

DeFi spent stretches of the last two years outearning the Fed, and understanding why tells you how onchain credit markets work.

Lending rates on Aave are set algorithmically based on utilization. High utilization pushes rates up while low utilization drags them down. The rate you see is a live market price for crypto leverage.

The BTC ETF approval in early 2024 and the election later that year pulled traders into borrowing stablecoins to buy more of the assets they expected to climb. Aave V3 USDC pushed above 10% in 2024, and DeFi was paying meaningfully more than the Fed.

That premium has compressed. Stablecoin supply more than doubled from early 2024 to 2026. Borrowing grew too, but not in the concentrated bursts that pushed rates up the first time around. The market wide base APY hit parity with the Fed Funds Rate recently, leaving little premium for the smart contract risk of parking stablecoins onchain.

DeFi yields have not been a reliable premium over TradFi. They are a cyclical reflection of the demand for leverage.

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