- Is DeFi in decline?
- The Paradox: TVL Keeps Rising Despite Lower Yields
- New Asset Managers in DeFi
- A Multi-Tiered Market
- Layered Blockchain Structures Working to DeFi’s Advantage
- The DeFi Squeeze: Fintech Up, DeFi Down
- Potential Catalysts for Lending Market Growth
Ryan Rodenbaugh, CEO and co-founder of Wallfacer Labs—a company focused on creating more efficient ways to generate yield in crypto through vaults.fyi—has analyzed the state of DeFi in 2025. According to him, the first quarter of 2025 highlights the evolution of DeFi. Despite a significant drop in yields on major lending platforms, innovations on the market’s periphery suggest that DeFi is still growing and evolving.
Is DeFi in Decline?
Yields across major DeFi lending platforms have dropped significantly:
- The benchmark USD yield has fallen below 3.1%, dipping under the U.S. 1-month Treasury yield of around 4.3% for the first time since late 2023. This metric, a weighted average across four leading markets, was close to 14% at the end of 2024.
- Spark has made four consecutive rate cuts in 2025. Starting the year at 12.5%, rates were reduced to 8.75%, then 6.5%, and now sit at 4.5%.
- Stablecoin yields on Aave’s mainnet are hovering around 3% for USDC and USDT—levels that would have been considered unappealing just a few months ago.
This decline suggests that the market has significantly cooled off since the hype of late 2024, with borrower demand on major platforms decreasing.
Парадокс: TVL растет, несмотря на более низкую доходность
Despite declining yields, the total value locked (TVL) in major stablecoin vaults has seen remarkable growth:
- The largest vaults on Aave, Sky, Ethena, and Compound have collectively grown nearly fourfold over the past 12 months, from $4 billion to $15 billion.
- Despite Spark’s consecutive rate cuts, TVL has more than tripled since the start of 2025.
- Even as yields have plunged from nearly 15% to below 5%, capital remains “locked in.” This seemingly contradictory trend reflects growing institutional confidence in DeFi protocols as legitimate financial infrastructure rather than speculative tools.
New Asset Managers in DeFi
The rise of curators marks a significant shift in DeFi lending. Platforms like Morpho and Euler have introduced curators who create, manage, and optimize lending vaults.
Curators act as a new category of DeFi asset managers, assessing markets, setting risk parameters, and optimizing capital allocation for higher returns. Unlike traditional service providers who merely advise on protocols, curators actively manage capital placement strategies across various lending opportunities.
On Morpho and Euler, curators handle risk management: selecting collateral assets, setting collateralization ratios, choosing price sources, and limiting supply. Essentially, they craft targeted lending strategies optimized for specific risk and return profiles, acting as intermediaries between passive lenders and income sources.
Firms like Gauntlet, which previously provided risk management services for Aave and Compound, now directly manage nearly $750 million in TVL across multiple protocols. With execution fees ranging from 0% to 15%, this could translate into millions in annual revenue with much higher profit margins than traditional service contracts. According to Morpho’s dashboard, curators collectively earned nearly $3 million and, based on first-quarter earnings, are projected to make $7.8 million in 2025.
Curators have collectively earned nearly $3 million
he most successful curator strategies have yielded higher returns primarily by accepting riskier collateral assets with more aggressive loan-to-value (LTV) ratios, particularly utilizing Pendle LP tokens. While this approach requires careful risk management, it has delivered superior yields in the current market conditions.
For instance, the top USDC vaults on Morpho and Euler have outperformed vaults.fyi, offering a base yield of 5-8% and a token-incentivized yield of 6-12%.
A Multi-Tiered Market
The evolving landscape has created a clear market structure:
- “Blue-chip” infrastructure (Aave, Compound, Sky)
It functions similarly to traditional money market funds, offering modest yields (2.4-6.5%) with maximum security and liquidity. This segment has captured the majority of TVL growth.
Infrastructure optimizers and strategy providers - Platforms like Morpho and Euler provide modular infrastructure for higher capital efficiency. Specialized firms such as MEV Capital, Steakhouse, and Gauntlet leverage these platforms to achieve yields up to 12% on USDC and USDT (as of late March 2025).
- This two-tiered system creates a more dynamic market where strategy providers can rapidly deploy new yield-generating opportunities without building underlying infrastructure. Ultimately, user returns depend on both the efficiency of the base protocol and the sophistication of the strategies layered on top of it.
This market restructuring means users must navigate a more complex environment where the interplay between protocols and strategies determines potential yields. While blue-chip protocols provide simplicity and security, the combination of optimizing protocols and specialized strategies delivers returns comparable to those previously seen on Aave and Compound during higher-rate periods.
Layered Blockchain Structures Working to DeFi’s Advantage
In the blockchain ecosystem, Layer 1 (L1) and Layer 2 (L2) refer to different infrastructure levels that address scalability, security, and decentralization.
L1 is the base layer blockchain (e.g., Bitcoin, Ethereum, Solana, Cardano). These networks handle transaction validation, consensus mechanisms (Proof-of-Work or Proof-of-Stake), and smart contract execution.
L1 processes all transactions on its own blockchain, ensuring decentralized security, but it has limited scalability. For example, before Ethereum transitioned to PoS, it struggled with network congestion issues.
L2 refers to additional protocols or solutions built on top of an L1 blockchain. Their main goal is to reduce congestion, speed up transactions, and lower fees. While L2 interacts with L1, it processes some operations off the main chain.
Despite the proliferation of L2 solutions, yield levels remain low across mature networks (Ethereum, Arbitrum, Base, Polygon, Optimism). The most attractive yield opportunities outside mainnet are concentrated on Base, highlighting its growing role as a secondary yield hub.
Newer networks with aggressive incentive programs (e.g., Berachain and Sonic) offer higher yields, though their sustainability remains uncertain as incentives phase out over time.
The DeFi Squeeze: Fintech Up, DeFi Down
A key development this quarter was Coinbase integrating Bitcoin-backed loans via Morpho on its Base network. This reflects the emerging concept of the “DeFi Mullet”—fintech interfaces leveraging DeFi infrastructure beneath the surface.
As Max Branzburg, Head of Consumer Products at Coinbase, put it: “We’re planting our flag, signaling that Coinbase is entering the blockchain space, bringing millions of users and their billions of dollars with us.” The integration enables users to access Morpho’s lending services directly through Coinbase’s interface, allowing them to borrow up to $100,000 in USDC using their Bitcoin holdings as collateral.
This approach reflects the belief that, eventually, billions of people will use Ethereum and DeFi protocols without even realizing it—just as they unknowingly rely on TCP/IP today. Traditional fintech companies are increasingly adopting this strategy, maintaining familiar user interfaces while leveraging DeFi infrastructure.
Coinbase’s implementation stands out for its deep integration within its own ecosystem. Users deposit BTC as collateral to mint cbBTC (wrapped Bitcoin), then borrow USDC (Coinbase’s stablecoin) on Morpho (a lending platform backed by Coinbase) within Base (Coinbase’s Layer 2 network).
Potential Catalysts for Lending Market Growth
Several factors could reshape the lending landscape by 2025:
- Democratized Curation: As curation models evolve, could AI agents in crypto enable individuals to become their own curators? While still in its early stages, blockchain automation suggests that personalized risk-reward optimization may soon become more accessible to retail users.
- RWA Integration: The continued adoption of real-world asset (RWA) integration could create new revenue streams that are less dependent on crypto market cycles.
- Institutional Adoption: Growing confidence among institutional investors in DeFi infrastructure is driving increased capital inflows, which could significantly shift lending dynamics.
- Specialized Lending Niches: The emergence of highly targeted lending markets catering to specific user needs beyond simple yield generation.
The most successful protocols will be those that can effectively operate across a broad risk spectrum—serving both conservative institutional capital and high-yield-seeking investors—by leveraging increasingly sophisticated risk management and capital optimization strategies.
