The once notoriously high returns provided by crypto lending services now struggle to compete with more traditional and secure options.
While 3-month Treasury yields are slowly rising, AAVE lending rates on USDC have fallen massively since May. The rates of the two products have now crossed, which means that the public debt offers a better payment than its decentralized competition.
High risk, low reward?
According to data provided by Bloomberg and Aavewatch, USDC deposited in AAVE V2 on Ethereum now yields just 0.2% annually, down from 2.4% in mid-May. In contrast, 3-month US Treasuries tripled from 1% to 3% over the same period.
The increase is largely due to Federal Reserve activity, which boosted performance in every sector outside of crypto. Digital asset markets still largely follow the stock market, which understandably crashed in response to the central bank’s hawkish policy. This same policy triggered a steady rise in short-term Treasuries.
The biggest decline in returns on AAVE appears to have occurred between May 13 and May 22, falling from 2.4% to 0.9%. It was only a week later The Collapse of Terrawhich helped spark a massive contagious meltdown in the stablecoin lending arena over the following months.
Yet, this in no way signals a lower risk from crypto lenders. Unlike traditional markets, crypto returns are not determined by risk profile, but by trading volumes. According DeFi Llamathe total value locked in DeFi protocols has decreased significantly since last year – particularly in June.
“The increased appetite for Treasuries has sucked liquidity out of crypto,” said Sidney Powell, managing director of crypto lending firm Maple Finance. Since Treasury yields are essentially risk-free, government debt proves more attractive than crypto on both fronts.
In 2021, the situation could not be more different. Interest rates – and by extension, treasury yields – were at historic lows, while crypto yields frequently hovered around 10%.
Such returns were easier to sustain during a bull market, especially as fund managers flocked to riskier assets like crypto in search of higher returns.
“Now the environment is very different,” said Andrew Sheets, chief multi-asset strategist at Morgan Stanley. “A key theme for all assets has been the shift from a near-zero and negative rate environment to one where you can get over 3% on a US government-backed triple-A rated treasury.”
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