Cryptocurrency investors who previously relied on decentralized finance (DeFi) for attractive passive income are now facing some tough truths. To put it simply, the numbers just don’t seem to add up anymore.
DeFi, or on-chain finance, allows users to conduct banking-like transactions on the blockchain without intermediaries such as banks. This means investors could lend, borrow, or trade almost instantly. Between 2021 and 2022, despite the subsequent downturn in the crypto market, the gains from DeFi were surprisingly strong. Interest rates soared, with platforms like Aave posting rates as high as 20%, and some emerging protocols reportedly offering wildly high returns. However, along with those enticing rates came considerable risks, including hacking and the potential for quick liquidation of funds.
Fast forward to 2026, and the scenario has shifted dramatically. Aave, which leads in total value locked among DeFi lending protocols, now offers just about 2.61% APY on USDC deposits. That figure falls short of Interactive Brokers’ 3.14% for idle cash—a seemingly minor difference that challenges a core DeFi principle: higher returns should accompany higher risks. It seems that funds in DeFi may now be riskier with lower yields.
As one trader succinctly put it, “DeFi: Earn 1% less than Treasury bills, but lose all your money once a year.” This perspective highlights changes in the DeFi landscape, which has long been advertised as a space where risks are warranted by exceptional returns. These days, that trade-off appears less tenable.
Where Did the Profits Go?
This isn’t how it used to be.
Back in 2024, DeFi yields were indeed competitive. A protocol named Ethena, which created a synthetic dollar stablecoin called USDe, boasted APYs exceeding 40% at its peak, drawing in billions. But those impressive figures were largely driven by the incentives tied to its native token and trading tactics that eventually fizzled out.
Since then, Aave’s yields have dwindled to around 3.5%, and the total locked value has decreased from about $11 billion to $3.6 billion. It’s worth noting that Ethena didn’t immediately respond to queries regarding this decline.
Research indicating daily borrowing costs across the DeFi lending market reveals similar trends. While these costs skyrocketed past 35% during the 2023 bull run, they have since plummeted to around 3.5%.
Looking across stablecoin lending markets, yields have also followed a downward trajectory. Aave’s largest USDT pool yields a mere 1.84%, with several others struggling to break the 2% mark. The once-available extra yields that boosted profits have largely vanished, and what remains now depends on lackluster borrowing demand.
Data suggests that Aave’s major stablecoin pools (USDT and USDC on Ethereum) yield just over 2% on a combined $8.5 billion in deposits. The top stablecoin pool, Lido, offers a 2.53% return, and Ethena’s staked USDe has dropped to 3.47%.
Currently, only a handful of protocols exceed the 3.14% offered by Interactive Brokers, mainly focusing on private credit products or strategies connected to real-world assets. One standout, the USDS Savings Rate at 3.75%, has drawn $6.5 billion in deposits, though it’s essential to note that around 70% of its revenue is sourced from off-chain entities like US Treasury products and institutional facilities. This distinction is quite crucial, especially for investors looking to DeFi partially to dodge such risks.
Beyond the basic USDC pool, Aave does have more competitive rates with select stablecoins. For instance, the sGHO product offers a yield of 5.13%, while other V3 Core options offer yields between 4.0% and 5.9%. Still, these options often don’t feature in many comparisons.
Paul Flambot, co-founder of the lending infrastructure protocol Morpho, mentioned that this bleak yield environment was somewhat predictable. He explained that “undifferentiated lending tends to converge to a risk-free rate,” as shared collateral among depositors limits opportunities for specialization and thus compresses returns.
Morpho, managing over $10 billion in deposits, promotes a different model by allowing curators to create tailored loan vaults with customized risk parameters and yield strategies. Some of these vaults yield around 3.64%, while certain offerings show yields as high as 6.48%.
Flambot added that the variation in yields is due to how risk is managed. “What’s unique about our model is that it fosters real competition for yield,” he stated, aiming for quality and differentiation rather than merely liquidity. This approach gives Morpho a better yield profile on stablecoins, backed by direct collateral like BTC and ETH.
Nevertheless, yields are far from last year’s highs.
Aave views the current yield situation as cyclical rather than structural, primarily due to overall negative crypto sentiment. With the Fear and Greed Index sitting below its 2022 low, it believes this decline in borrowing demand is responsible for lower deposit rates. “Aave’s stablecoin interest rates typically correlate with leverage demand,” a spokesperson noted, reassuring that any declines are not likely to be long-term.
“It’s Really Dark.”
However, the issue of lower yields is just part of a bigger picture. Trust in DeFi overall has taken a hit.
Recently, Balancer Labs, a prominent name in the decentralized exchange scene, shut down following a massive $110 million exploit. Governance tokens across various protocols are trading at low levels, leaving many feeling disheartened about the space.
Jay Bhavnani, a noted DeFi investor, expressed that the atmosphere feels “really dark,” attributing this to a combination of falling yields, shutdowns, and failures, creating a perfect storm of challenges. He remarked, “LPs are realizing that too many protocols pose too much risk for too little reward,” emphasizing that no immediate solution seems in sight.
Some push back against this pessimism, arguing that downturns tend to weed out the weaker projects, leaving stronger ones to thrive. Historically, DeFi has weathered such cycles and emerged with more resilient infrastructure. While that’s a valid point, investors sitting on today’s reduced profits find little comfort in it.
Apart from this, smart contract risks are becoming more pronounced, particularly regarding the limitations of audits. Last month, the Resolv protocol experienced a catastrophic exploit that led to losses around $25 million. The hacker found a way to receive an unexpected 50 million USR in return for just 100,000 USDC without exploiting any flaws in the smart contract itself. Instead, the system simply lacked basic protections.
At present, Resolv has debts amounting to $173 million against only $113 million in assets, and the USR token is trading at $0.13, well below its intended $1.00 peg, and continues to decline.
The incident is part of a troubling trend, with hackers reportedly stealing $2.47 billion in cryptocurrencies in just the first half of 2025, significantly more than all of 2024. As the CEO of Immunefi remarked, although on-chain code has become harder to exploit, hackers are shifting focus to operational lapses, key theft, and social engineering tactics.
This context is critical for investors deliberating between the 2-3% yields of DeFi and the 3.14% offered by traditional platforms. The additional profits that once justified the risk of DeFi have almost vanished.
Yet, yield comparisons don’t capture the whole picture. A spokesperson from Aave pointed out, “For borrowers and margin traders, our rates are much more competitive, with offerings up to 6.14% against IBKR’s 3.2%. Plus, Aave borrowers benefit as their collateral still earns yield, reducing true borrowing costs.”
Regulatory “Clarity”
On top of declining yields and ongoing security threats, DeFi is now grappling with regulations that could threaten its yield models.
The impending Digital Asset Market Transparency Act proposes banning passive yields from stablecoins solely pegged to the dollar. While rewards for activities like payments would remain, the rules seem murky, with skepticism from industry insiders about whether the bill’s text is sufficiently clear.
Markus Thielen of 10x Research suggested that should the Clarity Act pass, yields may migrate back to traditional finance and regulated products, posing challenges for DeFi.
The bottom line here is that the situation appears dire. Yields are shrinking, risks linger, and potential new regulations may further limit the already strained returns.
For now, what once seemed like attractive calculations for investors appears to be losing its appeal.
