The return of DeFi yields

After the industry-shattering implosion of FTX/Alameda in November 2022, DeFi yields entered a major downtrend. For many, the risks outweighed the rewards — especially with US Treasury Bills (T-Bills) offering a safer, higher-yielding alternative after the Fed began raising interest rates in earnest. 

Yet since Q4 2023, the crypto market has rebounded with a vengeance, propelled by upstart blockchains and newfangled narratives. While the attention economy unfolds, DeFi has been quietly outperforming the yields offered by T-Bills in recent months. But is it worth the risk?

DeFi yields are back

Over the last few months, DeFi yields have been trending upward. Blue-chip DeFi protocols are offering yields last seen during crypto’s bull market in 2022. 30-day averages show Aave v3 USDC and Compound v3 USDC yielding ~7% (plus additional token rewards) on the Ethereum mainnet — ~2% premium over T-Bills (5.4%). 

Notes: DeFi yields calculated as 30-day moving avg., excluding token rewards. T-Bill yield defined as Market Yield on U.S. Treasury Securities at 3-Month Constant Maturity, Quoted on an Investment Basis (DGS3MO). Sources: vaults.fyi, FRED.

Aave and Compound are the biggest (and widely regarded as safest) USD lending platforms in DeFi. USDC accounts for the lion’s share of stablecoin activity on both Aave and Compound and is regarded as the most liquid and easily redeemable stablecoin in DeFi. For this reason, the 30-day average yield on lending in Aave and Compound is the closest proxy we have to a “risk-free” USD lending rate in crypto. As shown via vaults.fyi, the largest DeFi markets on the Ethereum mainnet show superior yields (~6-7%) vs. T-Bills at 5.4% today.

Source: vaults.fyi (as of 8 Feb 2024)

The gap between DeFi and T-Bill yields only widens when moving farther along the risk curve and seeking more lucrative pastures on less-traveled networks. On the Polygon network, the Aave USDC yield is as high as ~13% — representing >8% premium over T-Bills. Despite some vaults having low TVL, there is still ample opportunity for more adventurous DeFi lenders to earn yields significantly higher than TradFi rates.

Source: vaults.fyi (as of 8 Feb 2024)

Are DeFi yields worth it?

While most eyes are elsewhere, a pivotal question emerges for those who have taken note of DeFi’s robust recovery: Is ditching T-Bills for DeFi yields worth the risk? 

Many whales seem to think so. The largest Aave USDC lender (as of 8 Feb 2024), 0x087d, deposited >$50M in USDC and USDT last month. One potential explanation for why lenders might use Aave and Compound over T-Bills is that they can short or hedge ETH/BTC positions using DeFi. However, analysis reveals that most of the large lenders on Aave and Compound are not borrowing any assets against their stablecoins. Compound’s largest USDC lender, 0x7f71, is supplying $65M in USDC without borrowing any assets. It appears many large DeFi lenders simply favor DeFi over the traditional financial system when choosing where to put their USD.

Despite this, significant shifts in the financial landscape could be imminent. Anticipated TradFi interest rate cuts could widen the yield gap between DeFi and T-Bill yields. In this scenario, DeFi yields may start to look more attractive to risk-averse lenders. The upcoming bitcoin halving and recent rebound of the crypto market have rekindled investor interest, giving cause for optimism. Additionally, the stablecoin supply remains $50 billion below its 2021 peak. Should the borrowing cost for stablecoins continue to rise, a potential undersupply might send DeFi yields higher.

Wallfacer Labs reached out to Marc Zeller – long-time Aave contributor and founder of the Aave-Chan Initiative. On increasing DeFi yields, he says, “Staking GHO is currently yielding just below 10%. It’s only logical that these higher yields will boost demand for GHO and other stablecoins on Aave. On top of that, DeFi is just more exciting than TradFi.”

Besides differences in yield, both savvy lenders and crypto-natives alike can appreciate DeFi for its permissionless nature, composability and 24/7 market access. In an environment of declining TradFi yields and emerging onchain markets, DeFi’s inherent characteristics may tip the scales in its favor for certain lenders. 

Maximize yields with vaults.fyi

This article derives all onchain data from vaults.fyi, a reliable resource for maximizing DeFi yields. If you’re interested in finding and monitoring the best DeFi yields, we recommend giving it a try. Furthermore, don’t hesitate to reach out to @ryanrodenbaugh on Telegram if you’re interested in using our API to fetch real-time data.

Wallfacer Labs