The crypto yield pitch was simple: accept smart contract risk, earn more than with a bank. It doesn’t work like that anymore.
Nowadays, Aave, the largest DeFi lending protocol by deposit base, offers just 1.84% on the world’s largest stablecoin, USDT, and an equally dismal 2.61% APY on the Coinbase-Circle stablecoin USDC.
Lido, the largest Ethereum liquid staking service, returns just 2.53%.
By contrast, Interactive Brokers pays 3.14% on idle cash with no lockup and zero crypto exploit risk. Another basic high-yield savings account at Axos Bank pays 4.21%.
The risk premium that justified DeFi’s existence has inverted.
Many of DeFi’s flagship products now pay less than a federally insured deposit account. Trader James Christoph posted what the rest of the market has started to think: “DeFi — Earn 1% below Treasury bills and lose all of your money one time per year.”
The yield compression is structural
Ethereum staking yields have fallen from above 5% shortly after its Merge blockchain fork to just 2.7%, as over 38 million ether now competes for the same validator rewards.
Yield from Ethena, whose crypto dollar sUSDe once delivered above 50% APY in 2024, has compressed 93% to just 3.56% while its total value locked has more than halved.
The CoinDesk overnight rate which benchmarks to Aave’s daily borrowing costs — a crypto play on words to the actual overnight rate for Fed funds — has collapsed from rate peaks in the double-digit percentages before settling to approximately 3% today.
Depending on the day over the last month, CoinDesk’s overnight rate has actually and quite embarrassingly been less than the actual overnight rate for US banks.
Across the stablecoin lending landscape, the picture is uniformly grim. Compound pays just 2.55% on USDC deposits. Sky’s USDS savings rate sits at 3.75%, the highest among blue-chip protocols, but derives around 70% of its income from offchain sources including US Treasuries and Coinbase USDC rewards.
Bitcoin, which used to attract high interest rates from borrowers demanding BTC loans, now earns nearly nothing on platforms that formerly paid handsome premiums.
Many DeFi investors have to walk way out onto the risk curve toward insanity to outperform TradFi.
Read more: DeFi yields exceed 60% APY on bitcoin with insane risks
Tokenized TradFi displaces DeFi
While crypto-native yields collapse, tokenized versions of traditional fixed-income products are growing into a deca-billion dollar sector.
- BlackRock’s BUIDL fund holds over $2 billion in assets and delivers 3.47% APY.
- Ondo Finance’s USDY manages $1.8 billion yielding 3.55%.
- Franklin Templeton’s BENJI holds over $1 billion paying 3.54%.
- Superstate’s USTB, a tokenized US government securities fund, holds $646 million paying 3.47%.
The average seven-day APY across the tokenized treasury sector is roughly 3.38%. That TradFi yield, tokenized, beats Aave’s offer from crypto’s two largest DeFi stablecoin pools.
The inversion is complete. An investor choosing Aave’s USDC pool over a tokenized Treasury fund accepts smart contract risk, regulatory uncertainty, and the possibility of a protocol exploit for a lower yield.
The premium for accepting smart contract risk has not just compressed. For many average depositors in average liquidity pools, it’s flipped negative.
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