Editor’s note: The DeFi market has been turbulent recently, with the popular project USDf briefly de-pegged due to concerns over reserve assets and income sources, followed by the established contract exchange GMX suffering losses of over $40 million from a hacking incident (see (Notorious DEX 'GMX' Hacked! Losses Exceed $40 Million, Major Vulnerabilities Revealed)). The market has been on edge, and in the face of seemingly good yields, the safety of principal appears even more important.
After the incident last night, stablewatch published an article titled 'Does the DeFi world have risk-free yields at all?' It is necessary for all users intending to continue participating in DeFi to review the underlying risk conditions of the market we are in once again.
The following is the original content from stablewatch, translated by Odaily Planet Daily.
Risk-free rate in DeFi
In traditional finance (TradFi), the 'risk-free rate' is the most commonly used benchmark for investment returns, representing the yield achievable without compromising principal. For example, U.S. Treasury bills—they are backed by the credit of the U.S. government, which can print money at will to repay debts (this is also the sacred logic behind Bitcoin's initial bullishness), 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 rate: The cornerstone of traditional finance
Let's quickly review. In traditional finance, the risk-free rate represents an ultra-safe benchmark return for investments. For example, government bonds—why are they 'risk-free'? Because the U.S. government backs them with credit, and it can print money to pay off debts even amid soaring inflation. This rate is the foundation of nearly all financial models: stock valuations, bond pricing, DCF analyses by analysts burning the midnight oil... all rely on it. You might think traditional financial rates should be stable and predictable, but that's not the case—there is a field called 'monetary policy' that specializes in regulating these rates, but that warrants a separate lengthy discussion.
Now, let's explore whether similar concepts exist in DeFi.
Why is there no true risk-free rate in DeFi?
In DeFi, the risk-free rate is more myth than reality. A seasoned peer once joked: 'In DeFi, we are all testing extremely high-risk new financial software with real money.' This is absolutely true. Early participants sometimes reap rich rewards for taking risks but can also suffer heavy losses. The allure and curse of the decentralized ecosystem lie in its absence of traditional safety nets—no central bank backing, no regulatory protection, and no FDIC insurance for your assets. Our intention in designing it was to exchange safety for the freedom of experimentation and innovation, but newcomers must understand they are facing a complex jungle of risks. Risks also include:
Rug pulls: Projects that promise outrageous returns disappear overnight with the funds;
Hacker attacks: Vulnerabilities in smart contracts can lead to sudden losses of millions of dollars for seemingly the safest platforms;
Cyber threats: North Korean hackers are eyeing DeFi protocols and users as a free lobster buffet;
There is also the principle of 'code is law,' which is a beautiful concept—transactions are irreversible and irrevocable. We have seen attackers make off with millions of dollars while claiming to 'follow the rules of the agreement,' making traditional legal recourse extremely difficult. Nevertheless, bounty hunters and law enforcement have successfully tracked down some of the perpetrators, but only a few cases are like this. In the DeFi market, the boundary between innovation and chaos remains fragile.
However, for those who wish to maintain peace of mind while seeking basic 'safe yields,' what options remain?
Pseudo risk-free yield options in DeFi
DeFi will not easily back down; while a perfect risk-free rate is far out of reach, there are still several close contenders.
AAVE: This blue-chip lending platform provides relatively reliable single-digit yields through supply and demand, having stood the test of time, often regarded as a 'safe haven' in DeFi.
Curve Finance: A stablecoin trading empire crafted by math enthusiasts, generating returns through trading fees (essentially making capital 'work') supplemented by $CRV token incentives. As one of the few nearly fully decentralized and well-operating cases, its tokens have maintained value over the past four years. Of course, participating in DAO governance is no game for the faint-hearted.
Tokenized U.S. debt: Platforms like Ondo and M bring U.S. Treasury bonds on-chain, providing yields of 3-4% (2025 data), combining the safety of traditional finance with DeFi innovation—though risks of smart contracts still exist.
These options differ greatly: AAVE's supply-demand mechanism, Curve's dependency on trading volume for revenue, and the 'safety' of tokenized U.S. debt cannot completely avoid blockchain failures and the potential risks dubbed as 'crime hotspots' by DeFi OGs. While they are not truly risk-free, they are currently the best options available.
Who is flocking to on-chain savings?
These 'pseudo risk-free' yields attract several unique user groups:
Non-U.S. investors: Seeking 'American-style returns' without the constraints of traditional banks. The previous generation of offshore investors achieved cross-border asset allocation by purchasing properties in London, Vancouver, or New York, and now they are directing their funds towards DeFi protocols.
Crypto whales: Many find that on-chain yield farming not only significantly outperforms traditional savings accounts but also maintains exposure to crypto assets, due to real-world barriers like security concerns and tax risks associated with large cash outs.
Unbanked individuals: With the rise of mobile wallets, users in regions with unstable local currencies are transferring their savings on-chain at a lower cost—opening a dollar account in many developing countries still faces high fees and bureaucratic barriers.
This trend is breaking through niche circles. On-chain savings, with their accessibility, yield advantages, and ability to overcome the limitations of traditional finance, are attracting 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 project are a direct response to market demand.
Yield-bearing stablecoins: A gamble between risk and return
Yield-bearing stablecoins (YBS) represent a significant evolution in the digital currency industry, combining the stability of dollar-pegged assets with endogenous yield mechanisms. By 2025, some YBS products may offer annualized returns of 6-12%, far exceeding traditional government bond yields. However, these enticing rates require careful evaluation.
High yields inevitably come with additional conditions. Most yields stem from active management, risk-bearing behavior, or acting as a counterparty in others' trades. Can it generate considerable returns? Indeed. But is it risk-free? Absolutely not.
This raises a fundamental classification issue: are these tools essentially stablecoins or crypto-themed investment funds? When returns significantly exceed those of risk-free benchmarks like government bonds, investors have clearly stepped outside the realm of risk-free. 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:
RWA-backed: Using tokenized real-world assets (from government bonds to auto loans and consumer credit) as underlying collateral. Some protocols maintain conservative strategies, while others venture into high-risk credit markets, trading higher default risks for excess returns.
Crypto-backed: Generating stablecoins through collateralized debt positions (CDPs) on platforms like Liquity and Abracadabra. They work well under normal market conditions, but can trigger bad debt accumulation and protocol turmoil when collateral rapidly depreciates.
YBS wrappers: Deploying underlying stablecoins to lending platforms like AAVE and Euler to generate benchmark yields and then wrapping those positions into certificate tokens. These tokens can be re-collateralized and stacked with token incentives, forming a multi-layered yield structure. While they can compound growth, the nested relationships between protocols can amplify systemic risks.
Delta neutral/synthetic position: Capturing capital rate differences through cross-platform long and short hedging. Profits depend on low-cost position building and maintaining interest rate spreads, but execution losses and extreme market volatility may render neutral strategies ineffective.
Algorithmic strategy: Automated systems capture market opportunities in real-time and adjust positions, offering operational efficiency but facing risks of infrastructure failures and algorithm malfunctions.
Active management fund: Strategic allocation by fund management companies within the DeFi framework, essentially replicating traditional asset management models on-chain. This model raises questions about the necessity of automation in smart contracts and may attract regulatory scrutiny over strict definitions of 'decentralization.'
Tranched products: Risk layering provides differentiated risk-return combinations for different investors. So-called 'safe' tier investors may inadvertently become providers of tail risk insurance, with their capital effectively buffering extreme losses of underlying assets.
Evolving yield paradigms
The strategies mentioned above represent the mainstream options currently enhancing stablecoin yields in DeFi protocols. The programmability of decentralized finance will continue to spur innovations in yield mechanisms, signaling that more complex hybrid strategies and new methodologies will emerge in the future. This dynamic evolution broadens the boundaries of financial engineering and demands that investors establish more sophisticated risk assessment frameworks—within the maze of on-chain yields, highlighted APR figures may merely be the starting point of a risk coordinate system rather than the endpoint.
Core conclusion: The high-risk nature of DeFi
The key insights we have drawn are as follows:
There is no real risk-free rate in DeFi;
Tokenized U.S. debt is closest to being risk-free, but far from invulnerable;
On-chain lending rates have achieved an independent price discovery mechanism;
Yield-bearing stablecoins trade stability for returns, 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, as the crypto community continues to carve out its territory outside the traditional financial system; high yields do exist but always come at a cost. Therefore, before investing savings into any yield-bearing products, always remember—diligently verify on-chain data; bearing risks is always the first principle of DeFi.
This article is republished with permission from: (Deep Tide TechFlow)
Original title: (The Risk-Free Rate in DeFi (Stablecoins): A 2025 Analysis)
Original author: Halko
Translated by: Azuma
'After GMX was hacked: DeFi's high-reward strategies are emerging, but are there really risk-free yields?' This article was first published in 'Crypto City.'
