DeFi yield shifts to low interest rate strategy amid market slowdown

DeFi lending continues to be one of the most active type of apps on multiple chains. The sector is adapting to the market slowdown by lowering its interest rates.

DeFi is lowering interest rates across the board, with all protocols shifting to the lower range of yield. DeFi lending protocols will usually adjust yield to reflect market conditions, pushing even Aave to go as low as 4.63%. Sky Protocol, formerly Maker, is down to 6.09%, from 12.5% near the peak of the market cycle.

Yield and passive income is key at this stage of the crypto cycle, driven by a record stablecoin supply. Those newly minted assets are often used for lending, achieving potentially significant yield. In addition to using USDT and USDC in DeFi protocols, some specially created stablecoins offer their own forms of passive income or incentives.

The DeFi space still holds over $96B in total value locked, mostly on the Ethereum ecosystem. In the past two months, value locked increased, though protocols are more conservative, aiming to avoid contagion.

The behavior of DeFi is also seen as a proxy signal for the overall health of the crypto market. Slowing DeFi activity reflects sentiment better than individual token rallies.

Stablecoin yield poses risks

Stablecoin yield offerings are vulnerable, especially if they’re tied to new native assets and rely on a bull market. Some of those synthetic assets remain risky and de-peg, as in the case of sUSD.

For that reason, some investors switch to USDC as the most conservative stablecoin, despite the low yields on Aave. In the coming years, yield-bearing stablecoins may receive additional scrutiny from regulators, as a new US bill has proposed a moratorium on this type of assets. Despite this, yield-bearing stablecoins are still trying to survive and mitigate risk, while smaller protocols continue to copy the same model with higher yield and risk levels.

The five major stablecoins offering yield as a native feature include Frax’s sfrxUSD and sFRAX, Ethena’s sUSDe, Sky sUSDS, and the remaining is sDAI from Maker. In the past month, all of the yield-bearing stablecoins decreased their offered interest rate to reflect lowered prices for Bitcoin (BTC) and Ethereum (ETH).

Major yield-bearing stablecoins mostly decreased their interest rate in the past month. | Source: Dune Analytics

Ethena’s stablecoin still offers the highest yield at 10.77%, as the protocol continues to have regular inflows from its trading fee positions. For the most part, trading funding fees remain positive, allowing Ethena to service its yield.

Despite this, the market conditions in the past month led to a decreased USDe supply, down from over 6B tokens to 5.2B. Ethena remains sustainable by adjusting the supply of USDe, reflecting the overall mood of the crypto market.

DeFi reflects slower growth for all types of altcoins

DeFi is slowing down for the Ethereum and Solana ecosystem. On Ethereum, the lower ETH market price threatened multiple liquidations on major protocols. For Solana, Kamino Finance decreased its value, as fewer borrowers bet on memecoins or other Solana-based assets.

The altcoin season index is at an all-time low, decreasing interest in speculative trading for smaller assets. Altcoins track the performance of BTC, though having a much lower downside.

The recent slowdown mostly affects legacy DeFi apps, which have already gone through multiple cycles of lowered yield. Currently, the DeFi lending market carries over $41B in value, down from a peak of nearly 50B in late 2024.

Risky new chains still offer high yield

The lowered yield for big DeFi protocols and yield-bearing stablecoins creates demand for much riskier investments. Berachain (BERA) remains one of the outliers, offering up to 60% yield for its native token. The Dolomite lending platform offers yields as high as 94% for risky assets.

Sonic’s Ring Protocol offers up to 48% in stablecoin yields and as high as 150% for specific pairs.

High-yield protocols are at a much higher risk of depegging and liquidations. However, the new chains and protocols are trying to gain users, citing their advantage to the relatively low yield of top DeFi apps.

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