Crypto investors who once turned to decentralized finance for easy passive income through juicy dividends are running into a new reality: the numbers no longer add up.
DeFi, or onchain finance, essentially conducts banking transactions on a blockchain, cutting out middlemen like banks and letting investors borrow, lend and trade in minutes. Back in 2021-2022 (and even through the subsequent crypto winter), DeFi’s returns were more than promising; rates reached 20% on protocols like Aave and thousands of percent on other new protocols, which would justify parking some money at high interest rates, albeit with a higher risk of hacks, exploitation and quick liquidations.
Read more: What is DeFi?
Fast forward to 2026, Aave, the largest DeFi lending protocol by total value locked, currently offers an APY of around 2.61% on USDC deposits. That’s below the 3.14% offered on free cash at Interactive Brokers, one of the most popular traditional platforms among crypto-native investors. The gap may not seem large on paper, but it undermines one of DeFi’s core theses: higher returns for higher risk. Instead, money sitting in DeFi now faces a higher risk of lower returns.
“DeFi: Earn 1% under T-bills and lose all your money once a year,” trader James Christoph wrote on X on March 22.
The blunt stance reflects a broader shift. For years, DeFi sold itself as a place where higher returns justified new forms of risk. Today, that trade-off looks harder to defend.
Where the proceeds went
It wasn’t always like that.
In 2024, DeFi yields looked really competitive. Athena – a protocol that issues a synthetic dollar stablecoin, USDe, backed by assets and hedged through derivative positions – saw its sUSDe product offering more than 40% APY at its peak, drawing billions in deposits. But those returns were largely a product of ENA (Athena’s native token) incentives and trading strategies that didn’t last.
Athena’s APY has since compressed to around 3.5%, while its total value locked (TVL) has fallen from a peak of around $11 billion to $3.6 billion. Athena did not immediately respond to a request for comment by press time.
Across the rest of the stablecoin lending market, interest rates have followed a similar path lower.
Aave’s largest USDT pool yields 1.84%, while several other pools are below 2%. The extra reward that once increased returns has largely disappeared. What remains is organic returns driven by loan demand, and this is not strong enough to push interest rates higher.
Data from vaults.fyi shows how far things have fallen. Aave’s two largest stablecoin pools – USDT and USDC on Ethereum – yield just over 2% on a combined $8.5 billion in deposits. Lido’s stETH, the largest pool, returns 2.53%, while Athena’s staked USDe has fallen to 3.47%.
Only a handful of protocols still beat Interactive Brokers’ rates of 3.14%. These are largely private credit products or strategies linked to real-world assets, such as Sky’s USDS savings rate of 3.75%, which has emerged as one of the more attractive havens in this environment, above the Aave average, attracting $6.5 billion in deposits.
But the rate comes with a caveat: around 70% of Sky’s income comes from offchain sources, including US financial products, institutional lines of credit and Coinbase USDC rewards. For investors who came to DeFi specifically to avoid that kind of exposure, the difference is important.
Aave offers increasingly competitive pricing on select stablecoins in addition to their flagship USDC pool. Its sGHO product currently yields 5.13%, while other options for V3 Core Ethereum include USDG at 5.9%, RLUSD AT 4.4% AND USDTB AT 4.0%. But these sit outside the headlines that most comparisons focus on.
Paul Frambot, co-founder of Morpho, a lending infrastructure protocol, says this dismal outcome for dividends was inevitable.
“Undifferentiated lending is converging towards risk-free rates because when every depositor shares the same security, the same parameters and the same outcome, there is limited room for specialization and yield compression,” he told CoinDesk.
Morpho, with over $10 billion in deposits, offers a different model. Its platform lets trustees build lending boxes — essentially customized pools with their own risk parameters, collateral choices and return strategies, managed by specialist teams rather than governed by a single set of rules. Some of these curated vault models can still generate relatively higher yields. Its Steakhouse Prime USDC and Gauntlet USDC Prime vaults both yield 3.64%, while one box, Sentora’s PYUSD offering, is at 6.48%.
Frambot says the difference comes down to how risk is managed. “What makes the vault and curator model different is that it externalizes risk curation and opens it up to real competition,” he said. “It creates an open marketplace for returns, where returns are driven by quality and differentiation of strategies rather than liquidity alone. It’s also why the bluechip stablecoin yield on Morpho is on average higher than in pooled models and backed by straightforward security like BTC and ETH.”
Still, yields are nowhere near what they were in previous years.
Aave frames the current weakness as cyclical rather than structural. The protocol points to unusually subdued crypto sentiment — with the fear and greed index below its 2022 lows — as a key driver of reduced loan demand, which in turn weighs on deposit rates. “Stablecoin prices on Aave have largely tracked demand for leverage,” a spokesperson told CoinDesk. “We do not see them as structurally lower going forward.”
The company also notes that its weighted average stablecoin deposit yield over the past year still beat Interactive Brokers’ top quote, meaning depositors who entered before 2025 would still be ahead today.
‘Really Dark’
However, lower yields are only part of the story. Trust across DeFi has also taken a hit.
Balancer Labs, once one of the most recognizable names in decentralized exchange infrastructure, recently shut down after a $110 million take. Governance tokens across the sector trade at low valuations. For many, it feels as if the energy has been drained out of the room.
Jai Bhavnani, a prominent DeFi investor, wrote on X that the space feels “really dark,” describing the combination of dividend compression, protocol shutdowns, and recent exploits as a perfect storm.
“LPs realize that most protocols are too much risk for little reward,” he wrote. “There is no catalyst on the horizon to change things.”
Some in the same thread pushed back, arguing that market downturns tend to wash out the weakest projects, leaving only the protocols that can truly sustain themselves. This counterpoint has historical precedent; DeFi has survived previous cycles and emerged with more robust infrastructure. That may be true, but it offers little comfort to investors sitting on compressed returns today.
Then there is smart contract risk, or more accurately, the growing array of risks that smart contract auditing cannot capture.
Last month, Resolv, a yield-bearing stablecoin protocol, was leveraged for around $25 million. An attacker deposited 100,000 USDC into the protocol’s minting contract and received 50 million USR in return, approximately 500 times the expected amount. The problem was not a bug in the smart contract code itself. Instead, the system lacked basic safeguards such as oracle checks and mintage limits.
The protocol now holds $113 million in assets against $173 million in liabilities. USR is trading at $0.13, having lost its $1.00 peg and continues to fall into late March.
The Resolv hack is part of a wider pattern. Hackers stole more than $2.47 billion in cryptocurrency in the first half of 2025 alone, already surpassing all of 2024, according to CertiK’s Hack3d report. Wallet compromises accounted for $1.7 billion of the total. Immunefi CEO Mitchell Amador told CoinDesk earlier this year that onchain code is indeed becoming harder to exploit, but that attackers are adapting, pivoting to operational errors, stolen keys and social engineering instead. For example, the recent $270 million exploitation of the Drift protocol was part of a social engineering program by North Korea.
For investors weighing a 2%-3% return on DeFi versus 3.14% at a traditional brokerage, that correlation is hard to ignore. The extra return that once justified the exposure has largely disappeared.
But the comparison of the deposit rate only tells part of the story. An Aave spokesperson said: “For borrowers and margin traders, Aave offers much more competitive rates than IBKR – currently 3.2% on Aave versus up to 6.14% on IBKR. Borrowers on Aave also benefit because their collateral continues to earn returns, further reducing effective borrowing costs compared to IBKR.”
Regulatory “Clarity”
In addition to compressed dividends and persistent security risks, DeFi now faces a regulatory threat targeting its dividend model.
The Digital Asset Market Clarity Act, the crypto industry’s most significant pending legislation, includes a provision that would ban passive stablecoin dividends earned simply for holding a dollar-pegged token. This would mean that rewards linked to activity, such as payments or transfers, would still be allowed, although the distinction remains unclear. Something that crypto industry insiders who reviewed the draft described to CoinDesk as “far too narrow and unclear.”
Recently, 10x Research’s Markus Thielen said that if the Clarity Act is passed, it could re-centralize dividends to traditional financial and regulated products, creating headwinds for DeFi.
Bottom line: The DeFi provisions of the bill remain unresolved, with several Senate Democrats citing concerns about illicit financing. But the direction of travel on dividends is clear enough: at a moment when DeFi returns are already struggling to justify the risk, Washington is potentially moving to further narrow the options.
That leaves DeFi in a tight spot. The dividend has fallen. There are still risks. And new rules could limit what’s left.
For now, the math that once attracted investors looks a lot less compelling.
Read more: How North Korea’s 6-Month Secret Spying Program Is Making the Crypto Community Rethink Security
