April 19, 2026
Crypto investors who once looked to decentralized finance (DeFi) for attractive passive income through high returns are facing a new reality: the numbers no longer add up. DeFi, or on-chain finance, involves bank transactions being executed on a blockchain, bypassing intermediaries such as banks and allowing investors to borrow, lend, and trade within minutes. In the 2021-2022 period, DeFi returns were particularly promising; interest rates reached up to 20% on protocols like Aave and thousands of percent on other emerging protocols. This seemed to justify depositing capital for high interest, even though it came with an increased risk of hacks, exploits, and rapid liquidations.
Now, in 2026, Aave, the largest DeFi lending protocol by total locked value, offers an annual interest rate (APY) of approximately 2,61% on USDC deposits. This is below the 3,14% offered by Interactive Brokers, one of the most popular traditional platforms among crypto investors. The gap may not seem large on paper, but it undermines one of the core tenets of DeFi: higher returns for higher risks. Instead, money placed in DeFi is now exposed to higher risk with lower returns.
“DeFi: earn 1% less than T-bills and lose your money once a year,” noted trader James Christoph on X on March 22. This powerful statement reflects a broader shifting sentiment. For years, DeFi has presented itself as a place where higher returns justify new types of risk. Today, it seems harder to defend this trade-off.
It wasn't always like this. In 2024, DeFi returns still seemed genuinely competitive. Ethena, a protocol that issues a synthetic dollar stablecoin, USDe, which is backed by assets and hedged via derivatives, offered its sUSDe product at its peak with over 40% APY and attracted billions in deposits. But these returns were largely due to ENA (Ethena's native token) incentives and trading strategies that proved unsustainable.
Ethena's APY has since fallen to approximately 3,5%, while the total locked value (TVL) has decreased from a peak of approximately $11 billion to $3,6 billion. The CoinDesk Overnight Rate, which tracks daily borrowing costs in DeFi lending markets, paints the same picture — it peaked above 35% during the 2023 bull market, subsequently stabilizing around 3,5% today.
In the rest of the stablecoin lending market, yields are following a similar downward path. Aave's largest pool for USDT yields 1,84%, while several other pools are below 2%. The extra reward that used to drive yields has largely disappeared. What remains is organic yield, driven by borrowing demand, which is not strong enough to boost returns.
Data from vaults.fyi shows how far the figures have dropped. Aave’s two largest stablecoin pools — USDT and USDC on Ethereum — account for just over 2% of a combined total of $8,5 billion in deposits. Lido’s stETH, the largest pool, accounts for 2,53%, while Ethena’s staked USDe has dropped to 3,47%.
When comparing current returns, it appears that only a handful of protocols surpass Interactive Brokers' 3,14%. These are primarily private lending products or strategies linked to real assets, such as Sky’s USDS Savings rate of 3,75%, which has grown into one of the more attractive havens in this environment and draws $6,5 billion in deposits. But this interest comes with a caveat: approximately 70% of Sky’s revenue comes from off-chain sources, including US government products, institutional credit lines, and Coinbase USDC rewards. For investors who came to DeFi to avoid that type of exposure, the distinction is clearly important.
Aave still offers more competitive rates for specific stablecoins outside its flagship USDC pool. The sGHO product currently yields 5,13%, while other options within V3 Core Ethereum, such as USDG (5,9%), RLUSD (4,4%), and USDTB (4,0%), are also available. However, these rates fall outside the key figures that most comparisons focus on.
Paul Frambot, co-founder of Morpho, a lending infrastructure protocol, indicates that this bleak outcome for yields was inevitable. “Unpolarized lending converges towards risk-free rates, because if every depositor shares the same collateral, the same parameters, and the same outcome, there is limited room for specialization and compression of yields,” he told CoinDesk.
Morpho, with over $10 billion in deposits, offers a different model. The platform enables trustees to build loan vaults—custom-made pools with their own risk parameters, collateral choices, and return strategies, managed by specialist teams rather than by a single set of rules. Some of these comprehensive vault models can still generate relatively higher returns. The Steakhouse Prime USDC and Gauntlet USDC Prime vaults both yield 3,64%, while one vault, Sentora’s PYUSD offering, stands at 6,48%.
Frambot clarifies that the difference lies in how risk is managed. “What makes the vault and curator model different is that it externalizes risk curation and opens it up to real competition,” he says. “That creates an open market for returns, where yields are driven by the quality and differentiation of strategies rather than just by liquidity. That is also why bluechip stablecoin returns on Morpho are on average higher than in pooled models and are backed by simple collateral like BTC and ETH.”
However, returns are well below what they were in previous years. Aave frames the current weakness as cyclical rather than structural. The protocol points to unusually low crypto sentiment — with the Fear and Greed Index below its lows in 2022 — as a major driver behind reduced borrowing demand, which in turn affects depositorates. “Stablecoin rates on Aave have largely followed the leav trend,” a spokesperson told CoinDesk. “We do not view them as structurally lower for the future.” Aave also states that the weighted average stablecoin deposit rate over the past year was still better than Interactive Brokers’ top offer. This means that depositors who invested before 2025 are still ahead today.
Lower returns, however, are only part of the story. Confidence within DeFi has also suffered. Balancer Labs, once one of the most recognizable names in decentralized exchange infrastructure, was recently shut down following a $110 million exploit. Governance tokens within the sector are trading at low valuations. For many, the energy level seems to have disappeared from the domain.
Jai Bhavnani, a prominent DeFi investor, described on X that the space feels “really dark,” characterizing the combination of yield compression, protocol shutdowns, and recent exploits as a perfect storm. “LPs are realizing that most protocols offer too much risk and too little reward,” he wrote. “There is no catalyst in sight to change things.” Some have countered in the same discussion, arguing that market downturns typically wash away the weakest projects, leaving only protocols with potential sustainability. This counter-argument has historical precedent; DeFi has survived previous cycles and bounced back with more resilient infrastructure. This may be true, but it offers little comfort to investors currently sitting with compressed returns.
Added to this is the risk of smart contracts, or more precisely, the growing range of risks that cannot be caught by smart contract audits. Last month, Resolv, a protocol for yield-generating stablecoins, was hacked for approximately $25 million. An attacker deposited 100.000 USDC into the protocol's minting contract and received 50 million USR, about 500 times the expected amount. The problem was not a flaw in the code of the smart contracts themselves. Instead, basic safeguards such as oracle checks and minting limits were missing from the system.
The protocol now holds $113 million in assets against $173 million in liabilities. USR is trading at $0,13, after losing its $1,00 peg and seeing a further decline towards the end of March. The Resolv hack fits into a broader trend. Hackers stole more than $2,47 billion in cryptocurrency in the first half of 2025 alone, thus already surpassing all 2024 figures, according to CertiK’s Hack3d report. Wallet compromises accounted for $1,7 billion of that total. Mitchell Amador, CEO of Immunefi, told CoinDesk earlier this year that on-chain code is actually becoming harder to exploit, but that attackers are adapting, focusing on operational failures, stolen keys, and social engineering. An example of this is the more recent $270 million exploit on the Drift protocol, which was the result of a social engineering program originating from North Korea.
For investors weighing a return of 2%-3% on DeFi against 3,14% at a traditional broker, this context is hard to ignore. The extra yield previously justified by the exposure has largely disappeared. But the comparison of deposit rates tells only part of the story. A spokesperson for Aave noted: “For borrowers and margin traders, Aave offers much more competitive rates than IBKR — currently 3,2% on Aave versus up to 6,14% on IBKR. Borrowers on Aave also benefit because their collateral continues to generate returns, which further lowers the effective cost of borrowing compared to IBKR.”
In addition to the compression of returns and persistent security risks, DeFi is now facing a regulatory threat targeting its return model. The Digital Asset Market Clarity Act, the most significant legislation currently pending within the crypto industry, contains a provision prohibiting passive stablecoin returns earned simply for holding a dollar-pegged token. This would mean that rewards linked to activity, such as payments or transfers, would still be permitted, although the distinction remains unclear. Some people in the crypto industry who have reviewed the draft have characterized the wording as “excessively narrow and unclear.”
Recently, Markus Thielen of 10x Research stated that if the Clarity Act is passed, it could recentralize returns into traditional finance and regulated products, creating headwinds for DeFi. In short, the provisions regarding DeFi in the bill remain unresolved, with several Democratic senators expressing concern about illegal funding. But the direction of yield development is clear enough: precisely at a time when DeFi returns are already struggling to justify risk, Washington appears to want to further restrict options.
That leaves DeFi in a difficult position. Returns are under pressure, risks persist, and new regulations could limit remaining earnings. For now, the mathematics that once attracted investors seems far less convincing.
Which factors have led to the decline in returns in DeFi?
The decline in returns in DeFi is due to various factors, including reduced borrowing demand, interest rate compression caused by the homogeneity of lending structures, and the shift to traditional platforms competing with DeFi offerings. Furthermore, recent exploits and the negative perception surrounding DeFi have also contributed to the decreased trust.
What are the risks that modern DeFi investors need to consider?
Investors must be aware of both the risks of smart contracts — where not all vulnerabilities are caught by audits — and the risk of security and mistrust in protocols resulting from hacks. Furthermore, there is growing concern regarding the potential impact of regulation, which could influence the future of DeFi.
How should investors respond to current DeFi market conditions?
Investors must reconsider their strategies and look at alternatives that can potentially offer higher returns with better risk management. It is crucial to closely monitor current market trends and regulations, as well as the reputation and track record of DeFi protocols, before considering new investments.
Bitcoin (BTC)
Ethereum (ETH)
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