Crypto Yields Are Starting to Pay Less Than Government Bonds

The once notoriously high yields provided by crypto lending services are now struggling to compete with more traditional, safer options.

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.

High Risk, Low Reward?

According to data provided by Bloomberg and Aavewatch, USDC deposited into AAVE V2 on Ethereum now yields just 0.2% per year – down from 2.4% in mid May. By contrast, US 3 month treasury bills have tripled from 1% yield to 3% in that same period. 

The increase is largely due to Federal Reserve activity, which has driven up yield in every sector besides crypto. Digital asset markets still largely track the stock market, which has naturally tanked in response to the central bank’s hawkish policy. That same policy has sparked a steady upward climb for short term treasury bills. 

The sharpest drop in yields on AAVE appeared to occur between May 13th and 22nd, dropping from 2.4% to 0.9%. This was only a week after Terra’s collapse, which helped trigger a massive contagious meltdown across the stablecoin lending arena in the following months. 

Yet this by no means signals lower risk involved with crypto lenders. Unlike traditional markets, crypto yields are not determined by risk profile, but by trading volumes. According to DeFi Llama, the total value locked in DeFi protocols has declined substantially since last year – especially this June. 

“Higher appetite for Treasuries has sucked out liquidity from crypto,” said Sidney Powell, the chief executive of crypto lending company Maple Finance. Given that treasury yields are essentially risk-free, government debt is proving more attractive than crypto on both fronts. 

Before the Tightening

In 2021, the situation couldn’t be more different. Interest rates – and by extension, treasury yields – were at historic lows, while crypto yields were frequently around 10%. 

Such yields were easier to maintain during a bull market – especially as money managers flooded into riskier assets like crypto seeking higher returns. 

“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.”