Hi readers, In today's newsletter, Crews Enochs of Index Coop says DeFi's base rate for lending stablecoins is a structural shift that challenges traditional finance by demonstrating the market-driven sustainability of high-yield, low-risk on-chain money markets. Then, Andy Baehr of CoinDesk Indices wonders if at a time when crypto mid-caps are struggling, a large-cap tilt in digital asset investing will deliver excess returns to investors. Thanks for joining us. |
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Stablecoin Revolution: Challenging Risk-Free Rates With On-Chain Money Markets |
In traditional finance, the "risk-free rate," the interest rate an investor can expect to earn on an investment that carries zero risk, serves as a fundamental benchmark for all investment decisions. Today, DeFi has quietly established its own equivalent: the base rate for lending stablecoins. Through battle-tested protocols like Morpho and Aave, lenders can now access double-digit yields that substantially outperform traditional fixed-income instruments, all while maintaining remarkable transparency and efficiency. The emergence of this new base rate isn't just a passing trend — it's a structural shift that challenges traditional finance by demonstrating the market-driven sustainability of high-yield, low-risk on-chain money markets. At times, yields on major platforms like Morpho have reached 12-15% APY for USDC lending, significantly outpacing the 4-5% offered by U.S. Treasuries. This premium exists not from excess risk-taking or complex financial engineering, but from genuine market demand for stablecoin borrowing. Market dynamics driving yields The rise of high-yield farming strategies, especially those involving Ethena's synthetic dollar (sUSDe) product, has been a key driver behind elevated stablecoin lending rates. Over the past year, Ethena's USDe and staked USDe (sUSDe) have delivered yields in the 20-30% APY range, fueling substantial demand for stablecoin borrowing. This demand comes from leveraged traders aiming to capture the spread created by these high yields. What sets Ethena apart is its ability to capture funding fees traditionally claimed by centralized exchanges. By offering sUSDe, Ethena allows DeFi participants to tap into profits generated from traders paying high funding rates to go long on major assets like ETH, BTC and SOL. This process democratizes access to these profits, enabling DeFi participants to benefit simply by holding sUSDe. The increasing demand for sUSDe drives more capital into the stablecoin economy, which, in turn, raises the base yield rates on platforms like Aave and Morpho. This dynamic not only benefits lenders but also strengthens the broader DeFi ecosystem by increasing yield and liquidity in the stablecoin lending market. Risk-adjusted returns in perspective While double-digit yields might raise eyebrows, the risk profile of these lending opportunities has matured significantly. Leading money market protocols have demonstrated resilience through multiple market cycles, with robust liquidation mechanisms and time-tested smart contracts. The primary risks — smart contract vulnerability and stablecoin depegging — are well understood and can be managed through portfolio diversification across protocols and stablecoin types. |
Annual Yield Comparison - Traditional Fixed Income vs. DeFi Lending Returns 30-day average as of February 1, 2025 Source: Traditional markets data from Bloomberg Terminal, DeFi markets data from vaults.fyi |
Implications for traditional finance For wealth managers and financial advisors, these developments present both an opportunity and a challenge. The ability to access stable, transparent yields that significantly outperform traditional fixed-income products demands attention. As the infrastructure for institutional participation in DeFi continues to improve, these yields may become increasingly relevant for income-focused portfolios. While yields are highly responsive to market cycles, especially funding rate dynamics, fluctuations are still common. However, the efficiency and transparency of on-chain money markets suggest that meaningful yield premiums over traditional alternatives could be sustainable in the long term. As DeFi infrastructure matures, these on-chain money markets may not only serve as a viable alternative to fixed-income products — they could become the new standard for transparent, risk-adjusted yields in the digital economy, leaving traditional finance to play catch-up. |
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Crypto mid-caps are struggling. While some digital asset investors may seek hidden gems and future powerhouses in the next tier of market capitalization and liquidity, that pursuit has generally not been rewarded. Furthermore, mid-caps have delivered significantly higher volatility. Less reward, more risk. What gives? Is this a mirror of "Mag 7" dominance in equities, a lack of promising assets in the mid tier or just the future of finance taking longer to bear fruit than we previously thought? We define our size segments using the CoinDesk 20 and CoinDesk 80 indices. CoinDesk 20 captures the performance of top digital assets with some constraints to promote adoption in a number of places and products — specifically, no memecoins, access to U.S. investors, select exchange listings and liquidity in specific pairs. CoinDesk 80 captures the next 80 assets outside of CoinDesk 20 — still reasonably large and still measurably liquid with fewer restrictions and more trading pairs allowed. In other words, the mid-caps. Both indices have a base date of Oct. 4, 2022 and a base value of 1000. As of this writing, CoinDesk 20 sits at around 3200. CoinDesk 80 sits at 970. You read that right: the CoinDesk 20 index has delivered a 320% return since its base date, while the CoinDesk 80 index has lost 3%. |
The volatility of CoinDesk 80 sits well above that of CoinDesk 20, although its patterns follow those of the other index and majors bitcoin and ether. |
What are these difficult digital assets in the mid-cap segment? Ill-conceived platforms? Frivolous projects? Not really. Although there are some highly volatile memecoins in the mix (I'm looking at you, PNUT), many constituents are household names. If we narrow our view to year-to-date performance of current constituents (CoinDesk 80 was reconstituted on Jan. 31) we see that only one constituent is up on the year, yet many of the leaders (and laggards) are names we have known for some time. |
Of course, pinpointing the underlying cause of the mid-cap underperformance is just as difficult in crypto as in other asset classes. Although size is one of the three classic Fama-French factors (suggesting that small-cap equities should outperform), it has not always been demonstrated in performance. We suspect that while the crypto community will trade just about anything, it tends to invest in the biggest, the longest-tenured and the most familiar names. Regulatory accommodations (e.g., ETFs) will also follow this pattern, leading to a broader set of investors. Does this suggest that a large-cap tilt in digital asset investing — the inverse of the Fama-French size factor — will deliver excess returns? We shall see, but in the meantime, we can keep an eye on the values of CoinDesk 20 and CoinDesk 80. |
- Andy Baehr, head of product and research, CoinDesk Indices |
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