The Shifting Landscape of Yield-Bearing Assets in DeFi

The decentralized finance (DeFi) world has for a long time been a haven for investors seeking yield, providing all sorts of options and opportunities to earn returns on their capital.

Yet, as the DeFi ecosystem has matured, it has revealed some significant changes in the yield-bearing asset landscape. Over the past year, the largely stable market for stablecoin yields has experienced a sharp drop-off, while other yield-bearing sectors in DeFi are finding their legs. And still, in this environment of seemingly less-appealing yield prospects, the total value locked in DeFi (TVL) keeps inching upward. So, what’s going on here? Unpacking the evolving DeFi yield narrative provides some clues. It’s a story of rising and falling interest rates; a shift in investor taste from stablecoin yields to DeFi credit opportunities; and a growing embrace of DeFi by institutional investors.

Stablecoin Yields Take a Dip, But TVL Grows

One of the most notable tendencies in the yield-bearing asset space has been the drop in stablecoin yields. Over the past year, the annual percentage yield (APY) across major stablecoins has fallen sharply, from a peak of 16% in late 2021 to an average of 3.1% in recent weeks. While this drop is simply a reflection of the much broader decline in global interest rates, it nonetheless marks a substantive shift for investors who used to flock to DeFi platforms in order to find high-yield opportunities in stablecoins.

Even though stablecoin yields have dipped, the total value locked in DeFi platforms that offer stablecoin-based lending and borrowing services continues to grow. Platforms like Aave, Sky (formerly MakerDAO), and Compound have seen their stablecoin TVL grow from around $4 billion to over $15 billion in the past 12 months. This 3 to 4-fold increase in TVL suggests that while individual returns on stablecoins may be lower, the capital flowing into these platforms is more resilient than ever.

The growth of TVL into DeFi protocols is partly due to people’s liking for the transparency and decentralization that these protocols offer, compared with traditional finance. Even as yield levels across DeFi have retraced somewhat over 2022, the yields remain much higher than those available across traditional finance. And, anecdotally, it seems like a lot of institutional and other large-scale investors are choosing to park assets within DeFi than across the Financial Services sector, largely because they value the neutrality and transparency that DeFi protocols offer.

Institutional Capital Shifts Towards Real-World Assets (RWAs)

Institutions are reallocating capital into decentralized finance (DeFi) core yield assets as traditional finance evolves (and as interest rates rise) into something that resembles an old-school fixed-income market with treasuries again seen as the ‘safe asset’ that occurs at the other end of the risk spectrum from equities.

These assets span a risk spectrum from government bonds to other forms of baseload collateral that make up the DeFi infrastructure.

A shift toward RWAs can be observed on Ethereum, where around 21–22% of capital is now allocated to RWAs. This trend is seen across all three chains and mirrors the movement toward yield diversification and preservation in the broader capital markets. Recent developments have highlighted that a substantial chunk of RWAs could soon be finding their way into the DeFi space, with investors trying to achieve the kind of alternative yields they used to get from traditional fixed-income instruments. By way of comparison, institutional investors on the Ethereum blockchain are now quite similar to the asset management industry. The latter used to be emblematic of the rigid, high-fee, and not-so-transparent alternative universe that was inaccessible to retail investors.

Additionally, entities such as BlackRock are now extending their remit into the DeFi sector. BlackRock’s BUIDL fund, which is established on the Solana blockchain, has issued more than $1.7 billion in tokenized treasury shares positioned as the largest on-chain yield-bearing treasury. This serves to deepen the traditional finance/DeFi integration and lend further legitimacy to the latter. Traditional asset tokenization, as is happening here with treasury shares, allows investors to gain exposure to DeFi while still reaping traditional yields. Among other benefits, tokenized treasuries afford clarion transparency, unprecedented liquidity, and decentralized governance.

The Rise of Yield Aggregators and Strategy Protocols

DeFi platforms are also seeing an increase in yield aggregators and strategy protocols. These protocols aim to provide users with even more efficient and sustainable return profiles that are auto-optimized across various platforms. Why does this matter? Because DeFi yield is getting more competitive, and if you’re not using a good combination of yield aggregators and decentralized allocation strategies, you’re potentially leaving a lot of yield on the table (or, more likely, in some smart contract vault that’s not quite as smart as one with auto-optimization features).

Yield aggregators gather the capital of users and employ it in a variety of protocols in order to maximize the returns on that capital. They are very much like mutual funds. A yield aggregator diversifies across many different strategies for generating yield. Also like mutual funds, yield aggregators serve as an on-ramp for DeFi. It is not necessary to understand a portfolio’s component parts in order to invest in DeFi if one invests in a yield aggregator.

Yield aggregators and strategy protocols work together to form a robust yield-generation landscape. Where yield aggregators are concerned, we are rapidly approaching a future in which they will no longer be simple smart contract implementations. By automatically routing capital to the best opportunities, these kinds of yield aggregators will be a central part of the DeFi ecosystem and offer sustainable yield-generation methods.

Conclusion: The Future of Yield-Bearing Assets in DeFi

Yield-bearing assets in DeFi are seemingly coming out of a long winter, with the total value locked in platforms like Aave, Compound, and Sky growing substantially. That’s in spite of something else that may appear as a negative: the yields on stablecoins, which have often served as the backbone of DeFi, are falling. At the same time, we’re in a world where DeFi is seen as a growth area, and yield-bearing assets certainly seem like the kind of thing DeFi ought to be able to provide.

Interest from institutions in tokenized treasuries and other RWAs is surging. So too is the interest in DeFi platforms from these same institutions. Why? Yield, obviously. DeFi platforms are ideal ecosystems for not just aggregating yield but also for delivering yield in just about every conceivable (and strategically advantageous) way to investors. When you can’t pay your pension fund a reasonable yield, and when Treasury yields are 5.00% but you want more than that, and when the “money Uber offers the world” is just a series of DeFi smart contracts that can pay what needs to be paid when it needs to be paid—all of this and much more is what makes the DeFi platforms your friends.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

Follow us on Twitter @themerklehash to stay updated with the latest Crypto, NFT, AI, Cybersecurity, and Metaverse news!