Markets While yields throughout main lending platforms have compressed considerably, innovation on the market’s edges demonstrates DeFi’s continued maturation and progress, says Ryan Rodenbaugh, CEO of Wallfacer Labs, the group behind vaults.fyi. 

The first quarter of 2025 tells a transparent story about DeFi’s evolution. While yields throughout main lending platforms have compressed considerably, innovation on the market’s edges demonstrates DeFi’s continued maturation and progress.

The Great Yield Compression

DeFi yields have declined sharply throughout all main lending platforms:

The vaults.fyi USD benchmark has fallen under 3.1%, under the U.S. 1-month T-bill yield of ~4.3% for the primary time since late 2023. This benchmark, a weighted common throughout 4 main markets, approached 14% in late 2024.

Spark has applied four consecutive rate decreases in 2025 alone. Starting the yr at 12.5%, charges have been minimize to eight.75%, then 6.5%, and now sit at 4.5%.

Aave’s stablecoin yields on mainnet are around 3% for USDC and USDT, ranges that may have been thought-about disappointing simply months in the past.

This compression indicators a market that’s cooled considerably from late-2024’s exuberance, with subdued borrower demand throughout main platforms.

The TVL Paradox: Growth Despite Lower Yields

Despite falling yields, main stablecoin vaults have skilled extraordinary progress:

Collectively, the biggest vaults on Aave, Sky, Ethena, and Compound have practically quadrupled in dimension over the previous 12 months, increasing from about $4 billion to about $15 billion in supply-side deposits.

Despite Spark’s consecutive fee cuts, TVL has grown greater than 3x from the beginning of 2025.

As yields have fallen from practically 15% to below 5%, capital has remained sticky. This seemingly contradictory habits displays growing institutional consolation with DeFi protocols as official monetary infrastructure fairly than speculative autos.

The Rise of Curators: DeFi’s New Asset Managers

The emergence of curation represents a major shift in DeFi lending. Protocols like Morpho and Euler have launched curators who construct, handle, and optimize lending vaults.

These curators function a brand new breed of DeFi asset managers, evaluating markets, setting danger parameters, and optimizing capital allocations to ship enhanced yields. Unlike conventional service suppliers who merely advise protocols, curators actively handle capital deployment methods throughout numerous lending alternatives.

On platforms like Morpho and Euler, curators deal with danger administration capabilities: deciding on which belongings can function collateral, setting applicable loan-to-value ratios, selecting oracle worth feeds, and implementing provide caps. They basically construct focused lending methods optimized for particular risk-reward profiles, sitting between passive lenders and sources of yield.

Firms like Gauntlet, beforehand service suppliers to protocols like Aave or Compound, now instantly handle nearly $750 million in TVL throughout a number of protocols. With efficiency charges starting from 0-15%, this probably represents tens of millions in annual income with considerably extra upside than conventional service preparations. Per a Morpho dashboard, curators have cumulatively generated practically 3 million in revenue and based mostly on Q1 income are on monitor to do 7.8mm in 2025.

The most profitable curator methods have maintained larger yields primarily by accepting higher-yielding collaterals at extra aggressive LTV ratios, significantly leveraging Pendle LP tokens. This strategy requires subtle danger administration however delivers superior returns within the present compressed surroundings.

As concrete examples, yields on the biggest USDC vaults on each Morpho and Euler have outperformed the vaults.fyi benchmark, exhibiting 5-8% base yields and 6-12% yields inclusive of token rewards.

Protocol Stratification: A Layered Market

The compressed surroundings has created a definite market construction:

1. Blue-chip Infrastructure (Aave, Compound, Sky)

Function much like conventional cash market funds

Offer modest yields (2.4-6.5%) with most safety and liquidity

Have captured the lion’s share of TVL progress

2. Infrastructure Optimizers & Strategy Providers

Base Layer Optimizers: Platforms like Morpho and Euler present modular infrastructure enabling better capital effectivity

Strategy Providers: Specialized corporations like MEV Capital, Smokehouse, and Gauntlet construct on these platforms to ship larger yields upwards of 12% on USDC and USDT (as of late March)

This two-tier relationship creates a extra dynamic market the place technique suppliers can quickly iterate on yield alternatives with out constructing core infrastructure. The yields in the end out there to customers rely on each the effectivity of the bottom protocol and the sophistication of methods deployed on high.

This restructured market means customers now navigate a extra complicated panorama the place the connection between protocols and methods determines yield potential. While blue-chip protocols provide simplicity and security, the mix of optimizing protocols and specialised methods gives yields akin to what beforehand existed on platforms like Aave or Compound throughout larger fee environments.

Chain by Chain: Where Yields Live Now

Despite the proliferation of L2s and different L1s, Ethereum mainnet continues to host lots of the high yield alternatives, each inclusive and unique of token incentives. This persistence of Ethereum’s yield benefit is notable in a market the place incentive applications have typically shifted yield-seeking capital to newer chains.

Among mature chains (Ethereum, Arbitrum, Base, Polygon, Optimism), yields stay depressed throughout the board. Outside of mainnet, a lot of the engaging yield alternatives are targeting Base, suggesting its rising position as a secondary yield hub.

Newer chains with substantial incentive applications (like Berachain and Sonic) present elevated yields, however the sustainability of those charges stays questionable as incentives finally taper.

The DeFi Mullet: FinTech within the Front, DeFi within the Back

A big improvement this quarter was Coinbase’s introduction of Bitcoin-collateralized loans powered by Morpho on its Base community. This integration represents the rising “DeFi Mullet” thesis – fintech interfaces within the entrance, DeFi infrastructure within the again.

As Coinbase’s head of Consumer Products Max Branzburg has noted: “This is a moment where we’re planting a flag that Coinbase is coming on-chain, and we’re bringing millions of users with their billions of dollars.” The integration brings Morpho’s lending capabilities instantly into Coinbase’s person interface, permitting customers to borrow as much as $100,000 in USDC towards their bitcoin holdings.

This strategy embodies the view that billions will finally use Ethereum and DeFi protocols with out understanding it — simply as they use TCP/IP right this moment with out consciousness. Traditional FinTech firms will more and more undertake this technique, maintaining acquainted interfaces whereas leveraging DeFi’s infrastructure.

The Coinbase implementation is especially notable for its full-circle integration inside the Coinbase ecosystem: customers publish BTC collateral to mint cbBTC (Coinbase’s wrapped Bitcoin on Base) and borrow USDC (Coinbase’s stablecoin) on Morpho (a Coinbase-funded lending platform) atop Base (Coinbase’s Layer 2 community).

Looking Forward: Catalysts for the Lending Market

Several components might reshape the lending panorama by way of 2025:

Democratized curation: As curator fashions mature, might AI brokers in crypto finally allow everybody to develop into their very own curator? While nonetheless early, advances in on-chain automation counsel a future the place custom-made risk-yield optimization turns into extra accessible to retail customers.

RWA integration: The continued evolution of real-world asset integration might introduce new yield sources much less correlated with crypto market cycles.

Institutional adoption: The scaling institutional consolation with DeFi infrastructure suggests rising capital flows that would alter lending dynamics.

Specialized lending niches: The emergence of extremely specialised lending markets focusing on particular person wants past easy yield era.

The protocols finest positioned to thrive shall be these that may function effectively throughout the danger spectrum, serving each conservative institutional capital and extra aggressive yield-seekers, by way of more and more subtle danger administration and capital optimization methods.

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