Author: Jae, PANews
The end of a cycle often begins with the most subtle indicators.
Since September 2025, the DeFi (Decentralized Finance) market has entered a "yield winter." The average annualized deposit yield (APY) for major stablecoins on leading lending protocols has hit its lowest level since June 2023.
On Aave V3 on the Ethereum mainnet, USDC and USDT deposit rates have fallen below 2%. Meanwhile, the yield on the U.S. 10-year Treasury note has rebounded to 4.24%. For DeFi players who experienced DeFi Summer and are accustomed to high APYs, this is not just a numerical decline but more like a death knell for the end of a cycle.
Is this merely a cyclical fluctuation, or is the market undergoing a structural reshaping?
Supply-Demand Mismatch: Excess Liquidity Triggers Interest Rate Collapse
Over the past six months, the interest rate curves of major lending protocols have shown a consistent downward trend, as their interest rate models experience a yield collapse caused by "oversupply."
Interest rates are the price of capital. The physical basis determining this price is the supply of capital.
Since 2024, the stablecoin sector has undergone an unprecedented "expansion wave," with its total market capitalization surging from less than $1.3 trillion to over $3.1 trillion, representing a compound annual growth rate of approximately 55%.
When the supply of a certain commodity (stablecoin liquidity) in the market increases significantly while demand remains sluggish, its price (interest rate) will inevitably fall. This is a basic principle of economics, and DeFi is no exception.
Taking the lending sector leader Aave as an example, its stablecoin utilization rate is declining significantly. As of March 12, Aave's total value locked (TVL) has reached as high as $42.5 billion.
A closer look at the capital structure reveals a concerning figure: active loans amount to only $16.3 billion. Over 60% of deposited assets are idle. This supply-demand imbalance has directly led to a rapid decline in interest rates.
This means that funds are being deposited but not borrowed, leading to severe liquidity congestion. Protocol algorithms are forced to automatically lower the interest rate curve in an attempt to attract more borrowers.
The stablecoin market has fallen into a "liquidity trap." When the market is flooded with low-cost capital but lacks high-return investment opportunities, these funds pile up in the pools of lending protocols.
Funding Rate Collapse and Cooling Circular Borrowing Lead to Leverage Slowdown
The prosperity of DeFi stablecoin interest rates is essentially driven by "leverage." When arbitrage activity in the perpetual futures market cools down, the borrowing demand for stablecoins shrinks rapidly, causing interest rates to plummet.
In a bull market, high bullish sentiment leads to positive and high funding rates. Arbitrageurs employ delta-neutral strategies like "borrowing stablecoins to buy spot + selling perpetual contracts" for risk-free hedging to earn the funding rate. In this process, stablecoins are the fuel.
However, the derivatives market has recently been sluggish. On major centralized exchanges (CEX), the funding rates for BTC and ETH have repeatedly been negative or at very low positive values. This reflects that bearish forces dominate the market or that bulls are extremely cautious.
Either explanation points to the same result: a lack of motivation for arbitrageurs.
When the annualized funding rate drops significantly, considering borrowing costs and transaction fees, the net profit for arbitrageurs is drastically reduced. Their demand for stablecoin borrowing subsequently plummets.
Another major source of stablecoin borrowing demand is circular borrowing. A typical path for this yield-enhancing strategy is: depositing yield-bearing assets like sUSDe into Aave, borrowing out stablecoins like USDC, and then converting the borrowed USDC into more sUSDe to deposit again.
This strategy was once widely used because the USDe yield was as high as 30%, while the borrowing cost was only around 10%, leaving an arbitrage spread of about 20 percentage points.
However, after the "1011" event, the spread narrowed catastrophically, and USDe also hit a "scalability" ceiling, its size dropping from nearly $15 billion to the current $6 billion.
For ordinary traders, a decrease in sUSDe yield reduces the strategy's spread. Their reduced demand for leveraged positions will further decrease their demand for stablecoin collateral.
This is a self-reinforcing negative cycle: demand shrinks → interest rates fall → demand shrinks further.
Shift in Crypto Market Risk Appetite, Capital Seeks Certainty
The overall decline in risk appetite in the crypto market is another important factor leading to lower stablecoin interest rates.
Over the past month, the Crypto Fear & Greed Index has frequently touched the "Extreme Fear" zone, and even with BTC prices holding around $70,000, sentiment has not shown sustained improvement.
CoinDesk Data also shows that total CEX trading volume fell by 2.41% in February to $5.61 trillion, the lowest trading volume since October 2024.
Since January 2024, the U.S. Federal Reserve's effective federal funds rate has remained above 3.6%. Although the market expects a moderate path of future rate cuts, the current real interest rate remains relatively high.
In this yield winter, not all protocols are shrinking. Sky (formerly MakerDAO) has built a unique "yield moat."
Compared to Aave, which relies more on on-chain borrowing demand, Sky's yield also comes from $1.5 billion in mature RWA assets. These assets include U.S. Treasuries, AAA-rated corporate debt, etc., which are unaffected by crypto market fluctuations and provide stable underlying cash flow.
This model of converting RWA into underlying collateral has driven a 68% month-over-month growth in USDS supply, with a market capitalization approaching $8 billion.
This allows Sky to assume a role similar to a "benchmark rate platform." In comparison, the rates for similar assets on Aave are almost non-competitive.
Thus, it is evident that Sky is transforming from a mere stablecoin protocol into a "fixed-income asset management" protocol, utilizing its massive RWA portfolio to hedge against downside risks in the crypto market. When internal DeFi demand is lacking, it can seek yield externally (from traditional financial markets).
For investors, learning to scrutinize the underlying logic of yields—whether they come from Treasury dividends or volatility premiums from futures markets—will be a required course this cycle. Strategies also need to shift from "chasing APY" to "seeking differentiated risk exposure."
The "yield winter" is not only the result of cyclical fluctuations but also a necessary growing pain for DeFi's "de-bubbling."
Perhaps, just as the trough of 2023 nurtured the prosperity of 2024, this interest rate bottoming may also be DeFi accumulating energy for the next leap forward.
