Architecting DeFi’s Yield Curve | DAS New York

Michael Apolito, co-founder of BlockWorks, emphasizes the need for transparency and professionalism in institutional capital markets, particularly in the context of crypto. He introduces BlockWorks Investor Relations, which offers real-time analytics and advisory support to enhance investor relations.

Luke Laeser, Head of Research at BlockWorks, discusses the emergence of DeFi's yield curve, recently established in the crypto market. He explains that the foundational elements for an on-chain yield curve have been created, enabling the trading and pricing of components entirely on-chain. Laeser introduces Athena, a platform that deploys user deposits into various strategies, capturing attractive carry yields for SUSDE holders, historically ranging from 5% to 25%.

Laeser elaborates on Pendle, a platform that trades yield-bearing assets by separating principal and yield components, allowing for trading based on future yield expectations. He illustrates how multiple maturities contribute to an on-chain yield curve that reflects market expectations, showcasing backwardation and contango to indicate future yield trends. The concept of rolling term spread is introduced to track the yield curve's slope over time, raising questions about its potential insights into market direction.

The relationship between term spreads and Bitcoin investments is also discussed. Laeser notes that steep backwardation correlates with negative returns over the next 90 days, while positive term spreads indicate positive returns. Observations reveal that nearly all contango instances resulted in positive forward returns, whereas steep backwardation rarely did. He highlights the strong inverse relationship between yield regimes and term spreads, with contango prevalent in low yield environments and backwardation in high yield ones.

Laeser discusses the term spread as a leading indicator for Bitcoin prices, noting its strong correlation with forward changes in underlying yields. Backwardation often precedes declines in yields, while contango signals increases. He analyzes the efficiency of the Pendle market, where implied yields typically command a premium, reflecting the demand for exposure to the right tail of the yield distribution. The yield curve serves as an indicator of risk premiums associated with hedging levered long positions.

Laeser concludes by pointing out the notable demand for Aave-listed bonds during high yield regimes and the high collateral utilization rates for SUSDE principal tokens compared to other crypto instruments. He asserts that DeFi now possesses an on-chain yield curve that offers insights into future changes in Bitcoin's cost of carry and related metrics.