Are Institutional Investors Turning to DeFi for Yields?
While DeFi yields are highly attractive to traditional investors, the DeFi market still carries risks, making the convergence of DeFi and TradFi a longer-term prospect.
Ethena's Convergence Thesis
Just recently, the Ethena stablecoin project published a report forecasting a convergence of capital and interest rates across DeFi, CeFi, and TradFi, with stablecoins expected to be the primary beneficiaries of this trend.
According to Ethena’s thesis, following the launch of Bitcoin and Ethereum ETFs, institutional investors will likely shift their focus to crypto-dollar savings products, which offer highly appealing yields compared to traditional financial instruments.
The most important financial instrument on earth to save and preserve wealth is simply a dollar with a yield. It sounds simple, but the demand for this product is several orders of magnitude larger than the entire crypto market combined, including Bitcoin.
Currently, Ethena offers an annual percentage yield (APY) of approximately 17.3%, whereas corporate and government bonds yield only about 4.4% to 6.8% annually. Given that stablecoins are relatively safe compared to other crypto tokens, Ethena’s team forecasts an increasing flow of capital from traditional investors into stablecoin savings products.
Double Digit APY in DeFi
Right now, stablecoin yields in the DeFi space are high, thanks to positive market sentiment and a strong demand for leverage. Investors have plenty of opportunities to earn returns through yield-bearing stablecoins like Ethena and Usual and various DeFi platforms designed for lending, bridging, and trading.
On average, yield-bearing stablecoins provide higher returns. For example, Ethena offers an impressive 17% APY, while Usual, another yield-bearing stablecoin, goes even further, delivering 27% APY on its USD0 stablecoin.
Traditional stablecoins such as USDT and USDC don’t inherently provide yields, but they still offer opportunities for attractive returns through DeFi platforms. Aave, the largest DeFi lending market, currently offers yields of around 11% on USDT and 8% on USDC. Depending on the stablecoin and platform, yields across lending markets range from 7% to an astonishing 53%. Some centralized stablecoins, such as PayPal's PYUSD offer lending with incentivized yields to help push adoption.
Beyond lending protocols, investors can earn yields by staking stablecoins in liquidity pools on decentralized exchanges and bridges. For example, the Uniswap DAI/USDT liquidity pool currently offers an APY of 23%. Alternatively, bridges such as Across Protocol yield around 9% on USDC.
These yields are certainly attractive, but they are not without risks. Issues like stablecoin depegging, project failures, or problems in smart contracts are still real concerns to keep in mind. Although incidents of losing all your assets while farming high yields, like 30% APY, have become less common, they remain a possibility.
Given these risks, the convergence of DeFi and TradFi—though promising as the future of finance—won’t happen overnight. The DeFi sector must continue strengthening its security and operational frameworks to gain the trust of traditional financial institutions and their clients.
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