Written by: stablewatch
Compiled by: Azuma (@azuma_eth)
Editor’s note: The DeFi market has not been very stable recently, first with the hot project USDf briefly losing its peg due to questions over reserve assets and sources of yield, and subsequently the established contract exchange GMX losing over $40 million due to a hacker attack (see 'Over 40 million stolen, the story of GMX's precise ambush'). In an instant, the market is in turmoil, and against seemingly decent yields, the safety of principal appears even more critical.
Following the incident last night, stablewatch published an article titled 'Is There Really Risk-Free Yield in the DeFi World?' For all who intend to continue participating in DeFi, it is necessary to review the underlying risk conditions of the market once again.
The following is the original content from stablewatch, translated by Odaily Planet Daily.
Risk-free interest rates in DeFi
In traditional finance (TradFi), the 'risk-free rate' is the most commonly used benchmark for investment returns, representing the yield that can be achieved without risking principal. For example, US Treasury bills—they are backed by the credit of the US government, which can print money at will to repay debt (this is also the sacred logic that initially fueled Bitcoin's bullish stance), but in the wild world of DeFi, the concept of 'risk-free' becomes blurred. Can we find something akin to a risk-free rate in DeFi? Let's delve into this chaotic world.
Risk-free interest rate: The cornerstone of traditional finance
Let's quickly review. In traditional finance, the risk-free rate represents a super-safe benchmark return. For example, Treasury bonds, why are they 'risk-free'? Because the US government guarantees them with credit; even if inflation soars, it can print money to repay debts. This rate is almost the foundation of all financial models: stock valuations, bond pricing, and the DCF analyses that analysts stay up late to perform... all rely on it. You might think that interest rates in traditional finance should be stable and predictable, but that's not the case—there's a field called 'monetary policy' that specializes in regulating these rates, but that's worth a separate long discussion.
Now, let's see if there are similar concepts in DeFi.
Why is there no true risk-free interest rate in DeFi?
In DeFi, the risk-free rate is more like a myth than a reality. A seasoned peer once joked, 'In DeFi, we are all testing extreme high-risk new financial software with real money.' This is no exaggeration. Early participants sometimes receive substantial returns for taking risks, while at other times they suffer significant losses. The allure and curse of the decentralized ecosystem lie in its lack of traditional safety nets—no central bank backstopping, no regulatory protection, and no FDIC (Federal Deposit Insurance Corporation) insuring your assets. The original intention of designing it was to trade security for freedom of experimentation and innovation, but newcomers must understand that they are facing a complex jungle of risks. Risks also include:
Rug pulls: Projects promising outrageous yields disappearing overnight with funds;
Hacker attacks: Smart contract vulnerabilities can cause those supposedly safest platforms to lose millions of dollars in an instant;
Cyber threats: North Korean hackers are eyeing DeFi protocols and users as if they are a free lobster buffet;
Additionally, there is the tenet of 'code is law,' which is a beautiful idea—trades are irreversible and cannot be undone. We have seen attackers making off with millions of dollars while claiming to 'follow the rules of the protocol,' making traditional legal recourse extremely difficult. Nonetheless, bounty hunters and law enforcement have successfully tracked down some perpetrators, but only a few cases like this exist. In the DeFi market, the boundary between innovation and chaos remains fragile.
However, for those who wish to stay as worry-free as possible while searching for basic 'safe yield,' what options are available?
Pseudo risk-free yield options in DeFi
DeFi will not easily concede; although a perfect risk-free rate is out of reach, there are still several close candidates.
AAVE: This blue-chip lending platform provides relatively reliable single-digit yields through a supply and demand mechanism, having been tested over the years, and is often regarded as a 'safe haven' in DeFi.
Curve Finance: A stablecoin trading empire built by math enthusiasts, generating revenue through trading fees (essentially making funds 'work') and supplemented by CRV token incentives. As one of the few nearly fully decentralized and well-functioning cases, its token has maintained value over the past four years. Of course, participating in DAO governance is not a game for the faint-hearted.
Tokenized US Treasury Bonds: Platforms like Ondo and M bring US Treasuries on-chain, offering 3-4% bond-like yields (2025 data), combining the safety of traditional finance with DeFi innovation—although smart contract risks still exist.
The differences between these options are vast: the supply and demand mechanism of AAVE, the trading volume-dependent revenue model of Curve, and the 'safety' of tokenized US Treasury bonds cannot completely avoid the potential risks of blockchain failures and being humorously referred to as a 'hotbed of crime' by DeFi OGs. They are not truly risk-free, but they are currently the best choices.
Who is rushing into on-chain savings?
These 'pseudo risk-free' yields attract a few unique user groups.
Non-US investors: Pursuing 'American-style returns' while unwilling to be bound by traditional banks. The previous generation of offshore investors achieved cross-border asset allocation by purchasing properties in London, Vancouver, or New York; now they are directing funds toward DeFi protocols.
Crypto whales: Many find that on-chain yield farming can significantly outperform traditional savings accounts while maintaining exposure to crypto assets, due to the security concerns, tax risks, and other real-world obstacles associated with large cash outs.
Unbanked individuals: With the proliferation of mobile wallets, users in unstable local currencies are transferring savings on-chain at lower costs—opening a USD account still faces high costs and bureaucratic barriers in many developing countries.
This trend is breaking through niche circles. On-chain savings, with their accessibility, yield advantages, and ability to address traditional financial limitations, attract all those seeking alternatives to the banking system. As infrastructure like mobile wallets continues to evolve, this shift could reshape the financial landscape—initiatives like JPMorgan's stablecoin program are responses to market demand.
Yield-bearing stablecoins: The game of risk versus return
Yield-Bearing Stablecoins (YBS) represent a significant evolution in the digital currency space, combining the stability of dollar-pegged assets with an endogenous yield mechanism. In 2025, some YBS products offer annualized yields of 6-12%, far exceeding traditional Treasury bond yields. However, these enticing returns require careful assessment.
High yields necessarily come with additional conditions. Most of the yield comes from active management, risk-taking behavior, or serving as a counterparty to others' trades. Can it generate significant returns? Indeed. But is it risk-free? By no means.
This raises a fundamental classification issue: are these tools essentially stablecoins or crypto-themed investment funds? When yields significantly exceed risk-free benchmarks like Treasury bonds, investors have clearly departed from the risk-free realm. Their value proposition essentially remains a classic risk-return trade-off: higher yield potential necessarily corresponds to higher risk exposure.
Analysis of yield enhancement strategies
DeFi protocols often employ various yield enhancement strategies, each with unique risk characteristics and operational logic.
Real asset-backed (RWA-backed): Using tokenized real assets (from Treasury bonds to auto loans, consumer credit, and other complex assets) as underlying collateral. Some protocols maintain conservative strategies, while others venture into high-risk credit markets, trading higher default risks for excess returns.
Crypto asset collateral type: Generating stablecoins through collateralized debt positions (CDP) on platforms like Liquity and Abracadabra. They operate well under normal market conditions but may trigger bad debt accumulation and protocol turmoil when collateral rapidly depreciates.
Stablecoin wrapping type (YBS wrappers): Deploying base stablecoins to lending platforms like AAVE and Euler to obtain benchmark yields, then wrapping those positions into tokenized certificates. These tokens can be re-collateralized and layered with token incentives, creating a multi-layered yield structure. While they can compound and appreciate, the nested relationships between protocols can amplify systemic risks.
Delta-neutral / synthetic position type: Achieving funding rate differences through cross-platform long and short hedging. Profitability depends on low-cost positions and maintaining interest spreads, but execution losses and extreme market volatility may cause neutral strategies to fail.
Algorithmic strategy type: Automated systems capture market opportunities in real-time and adjust positions, although they possess operational efficiency, they face risks from infrastructure failures and algorithmic breakdowns.
Active management fund type: Fund managers strategically allocate within the DeFi framework, essentially replicating traditional asset management models on-chain. This model raises questions about the necessity of smart contract automation and may attract regulatory scrutiny over strict legal definitions of 'decentralization.'
Tranche products type: Layering risks to provide differentiated risk-return combinations for different investors. So-called 'safe' tier investors may unwittingly become tail risk insurance providers, with their funds effectively serving as a buffer for extreme losses of the underlying assets.
Evolving yield paradigms
The aforementioned strategies represent the mainstream solutions for enhancing stablecoin yields in current DeFi protocols. The programmable nature of decentralized finance will continue to spur innovation in yield mechanisms, indicating that more complex hybrid strategies and new methodologies will emerge in the future. This dynamic evolution not only expands the boundaries of financial engineering but also requires investors to establish more sophisticated risk assessment frameworks—within the maze of on-chain yields, highlighted APR figures may merely be the starting point of the risk coordinate system rather than the endpoint.
Core conclusion: The high-risk nature of DeFi
The key insights we have derived are as follows:
There is no true risk-free interest rate in DeFi;
Tokenized US Treasury bonds come closest to being risk-free, but they are by no means impervious;
On-chain lending rates have established an independent price discovery mechanism;
Yield-bearing stablecoins trade stability for yield, essentially resembling neutral hedge funds in the on-chain market rather than savings accounts;
Yield strategy risks vary—higher returns come with greater risks.
Does the high-risk nature of DeFi constitute a fatal flaw? Not necessarily, after all, the crypto community has always been striving to carve out its territory outside the traditional financial system, and high yields do exist, but they always come at a cost. Therefore, before putting any savings into any yield-bearing product, please remember—diligently verify on-chain data, and personal risk assumption is always the first principle of DeFi.
