DeFi Yields Are Too Damn Low! Here's Why

DeFi yields are structurally mispriced relative to the risks involved. USDT deposited on Aave currently yields 3.92 percent while the Federal Reserve pays 3.6 percent, meaning depositors accept only 30 basis points of additional yield over a risk-free rate despite bearing smart contract risk, governance risk, and the possibility of total loss. Santi argued that DeFi yields should never fall below Treasury yields because smart contract risk alone categorically justifies a premium, yet Aave and Morpho are currently at or below that level. He has had no capital deployed on chain for the past two and a half years, since US Treasury rates rose and DeFi borrowing demand collapsed.

The appropriate benchmark, according to Santi, is senior secured private credit, which currently offers 12 to 18 percent with no smart contract risk, making high-teens yields the minimum to justify going on chain. Blackstone, Oaktree, and Apollo are paying 12 to 14 percent or higher while employing far more rigorous underwriting than the vault curators and credit originators currently operating in DeFi. Michael Saylor is paying 11.5 percent for STRK digital credit, and Ledin's S&P Global triple-B-minus rated Bitcoin asset-backed security priced its senior tranche at 6.84 percent with more than two times oversubscription and its junior tranche at 9 percent. Tether funding obscure loans at 4 percent when it could be funding a strategy at 11.5 percent was cited as a concrete example of mispriced yield.

Two structural forces suppress on-chain yields. First, a captive pool of on-chain liquidity exists because many users who made money in DeFi cannot easily exit, in some cases because they did not report gains, and these users will accept whatever yield is available rather than earn zero. Second, on-chain capital is less fungible than off-chain capital and does not price risk with the same discipline as markets where dollars move freely across Treasuries, private credit, and credit card loans. The arbitrage between DeFi and CeFi yields is further blocked because DeFi requires anonymity while CeFi requires identity, and there is no mechanism to harmonize the two pools. DeFi stablecoin yield products also function in the United States as a regulatory workaround, since accepting dollar deposits from Americans and paying yield requires a bank charter or securities registration, whereas spinning up a DeFi protocol carries none of those legal requirements, and speakers expect this loophole to close once regulatory clarity arrives.

Danielle argued that yield is not the core product of DeFi but rather a use case, and that oversupply of assets like ETH in lending markets is a structural cause of low yields rather than a product failure. She contended that ETH lending yields will rise again during a bull market when demand for leveraged speculation increases, and that stablecoins were put on chain primarily to transfer money globally, 24 hours a day, in seconds, with yield being a consequence of the infrastructure rather than its original purpose. Excessive focus on yield nonetheless led DeFi builders to create products using leverage, rehypothecation, and credit tranching to manufacture the 8 to 10 percent yields users demanded, which one speaker called a foundational error.

April was described as the worst month on record for DeFi hacks. In the Kelp DAO attack on Aave, a large amount of rsETH was minted, deposited into Aave without any approval process, immediately borrowed against, and withdrawn, effectively allowing someone to borrow against a position that did not exist. Santi argued Aave should have implemented a 48-hour approval period for abnormal spikes in a particular market and described the absence of such a guardrail as obvious in hindsight. AI capabilities are accelerating the sophistication of such attacks, and speakers noted that DeFi hacks are effectively funding North Korea's nuclear program to the tune of 600 million to one billion dollars per year, roughly 7 to 8 percent of North Korea's GDP. Santi also flagged that Chaos Labs exited Aave and discontinued its risk management work there, and noted that almost no one knew Aave was using a one-of-one DVN with LayerZero, illustrating that unknown protocol dependencies represent largely invisible and unpriced risk.

A fundamental problem for serious allocators is that while expected loss in DeFi may be computable, loss attribution is not, because there are no guardrails preventing some participants from exiting first and bearing zero loss while others bear everything. Mauricio noted that in CeFi bankruptcies such as Genesis and BlockFi, users who withdrew early faced clawback lawsuits, victims received court-ordered recoveries, and perpetrators could be jailed, whereas in the Thorchain bankruptcy no one went to jail and there was no legal recourse for victims. The future of lending is expected to move toward siloed pools rather than pooled liquidity, because institutional lenders want exposure to specific, rated loan books rather than commingled risk, and Aave V4 was cited as evidence that Aave itself understands this direction. The panel collectively concluded that DeFi yields are not compensating for risk, and investors were advised to be very conservative about where they place capital given the number of unknowns.