Bonds vs. DeFi Lending: Which is More Profitable?

Bonds are a safer and more profitable investment than DeFi lending.

The crypto lending industry was once renowned for its high yields, but now it is struggling to compete with more traditional options. While crypto lending offers some advantages, such as 24/7 operation and potentially higher returns, the risks are simply too high for many investors.

While yields for 3-month treasury bills slowly rise, AAVE's lending rates on USDC have slumped massively since May. Rates for the two products have now crossed one another, meaning government debt is offering a better payout than its decentralized competition. This is a huge shift in the market, and it's sure to have repercussions for both AAVE and USDC. For now, it looks like government debt is the more attractive investment option.

Is high risk always worth the reward?

It's safe to say that the bloom is off the rose when it comes to crypto lending. what was once a promising investment opportunity with high yields is now looking less attractive, with rates falling to just 0.2% per year. This is in contrast to other safe investments like US government debt, which has seen its yields triple in the same period. For now, it seems that crypto lending is no longer the best option for those looking to get the most out of their money.

I believe that the increase in yields is largely due to Federal Reserve activity. This has driven up yields in every sector besides crypto. I think that digital asset markets still largely track the stock market, which has tanked in response to the central bank's hawkish policy. I think that same policy has sparked a steady upward climb for short term treasury bills.

It is clear that the stablecoin lending arena is in a state of turmoil. The sharp drop in yields on AAVE appears to be only the beginning. With the collapse of Terra, it is likely that we will see more instability and contagion in the months to come.

The recent decline in the value of cryptocurrencies locked in DeFi protocols does not signal lower risk for crypto lenders. Unlike traditional markets, crypto yields are not determined by risk profile, but by trading volumes. This means that even though the overall value of cryptocurrencies has declined, the risk involved in lending them has not changed.

It's no surprise that government debt is proving more attractive than crypto, given that treasury yields are essentially risk-free. But this higher appetite for Treasuries has sucked out liquidity from the crypto market, according to Sidney Powell, the chief executive of crypto lending company Maple Finance. This is bad news for crypto investors and businesses, as it means there's less money available to be invested in or loaned out. However, it's understandable given the current environment of uncertainty and low interest rates.

Before the Tightening

In 2021, interest rates and treasury yields are at historic lows, while crypto yields are frequently around 10%. This difference is due to the increased demand for crypto assets, which has driven up prices and made crypto a more attractive investment than traditional assets.

It's easy to see why cryptoassets became so popular during the last bull market. With yields on traditional assets like stocks and bonds relatively low, money managers were seeking higher returns in riskier assets like crypto. While the recent bear market has been tough on crypto investors, I believe that the long-term outlook for the asset class remains positive.

“Now the environment is very different,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “A key cross-asset theme has been the shift from a near zero and negative rate environment to one where you can get over 3% on a triple A-rated T-bill that’s guaranteed by the US government.”

Investors in the cryptocurrency space have long been drawn to the asset class for its potential to generate high returns. However, with yields on government bonds falling to record lows, crypto assets are starting to look less attractive from a yield perspective.