Collapse of stablecoin yields

Introduction

Has the era of easily earning cryptocurrency yields really come to an end? A year ago, depositing money into stablecoins felt like cheating, providing both generous interest rates and (supposedly) no risk. Now, that illusion has been shattered. Opportunities for yield in stablecoins across the cryptocurrency sector have collapsed, leaving DeFi lenders and yield farmers in a near-zero return predicament. Where exactly has the once “risk-free” annual percentage yield (APY) gone? And who is to blame for the decline of yield farming? Let us delve into the current state of stablecoin yields, and the results are shocking.

The dream of “risk-free” returns is dead

Do you remember the good times around 2021? Back then, various protocols tempted users to invest in USDC and DAI with double-digit annual percentage yields (APY) as if selling candy. Centralized platforms promised stablecoin yields of 8% to 18%, growing their assets under management (AUM) to astonishing levels in less than a year. Even those DeFi protocols considered “conservative” offered over 10% stablecoin deposit yields. It was as if we had cracked the financial system and picked up money for free! Retail investors flocked in, firmly believing they had found risk-free returns of 20% on stablecoins. We all know the eventual outcome.

Fast forward to 2025: this dream is on the verge of collapse. The yields on stablecoins have fallen to single digits or even zero, utterly crushed by a dual blow of various factors. The promise of “risk-free returns” has long since shattered and was never truly real to begin with. The “golden goose” of DeFi has ultimately turned into a headless chicken.

Token Crash, Profits Follow Suit

The culprit is obvious: the cryptocurrency bear market. The drop in token prices has stifled many sources of income. The DeFi bull market was supported by high-priced tokens; the reason you could earn an 8% yield on stablecoins was that the protocol could mint and distribute governance tokens whose value soared. But when these token prices plummeted by 80% to 90%, the show was over. Liquidity mining rewards dried up or became nearly worthless. (For example, Curve's CRV token price once approached $6, but now it has fallen below $0.5—plans to subsidize liquidity provider yields have completely failed.) In short, the bull market is over, and the free lunch has vanished.

Accompanying the price decline is a massive outflow of liquidity. The total locked value in DeFi (TVL) has evaporated from its peak. After reaching its peak at the end of 2021, TVL began to plummet, dropping over 70% during the crash from 2022 to 2023. Billions of dollars in funds fled various protocols, either due to investors cutting losses or chain failures forcing projects to dissolve. With half of the funds lost, yields naturally shrank significantly: borrowers decreased, transaction fees fell, and the circulation momentum of tokens also greatly diminished. The result: although there was a slight rebound in 2024, DeFi TVL (more accurately, “total value lost”) still struggles to recover even a small fraction of its former glory. When the fields turn to desert, yield farms cannot harvest anything.

Risk Preference? Extremely Scarce

Perhaps the most important factor stifling returns is fear. The risk appetite in the cryptocurrency market has plummeted to an all-time low. After experiencing the painful lessons of CeFi and the collapse of DeFi, even former speculators have started to say, “No, thank you.” Both retail investors and whales have largely given up on the once-popular game of chasing returns. Since the catastrophic events of 2022, most institutional funds have paused their investments in cryptocurrencies, and those retail investors who suffered losses are now more cautious. This shift in mentality is evident: why chase a 7% return on a lending application that could disappear overnight and has an unclear origin? The saying, “If it sounds too good to be true, it probably is,” has finally resonated deeply.

Even within DeFi, users only dare to choose the safest strategies. Leveraged yield mining, which was once all the rage during the DeFi summer, has now become a niche market. Yield aggregators and vaults are similarly quiet; Yearn Finance is no longer a hot topic in the CT. In short, no one is willing to try those fancy strategies now. The collective risk aversion is stifling the once enticing yields that could bring hefty returns. No risk appetite = no risk premium. What remains is only a meager base interest rate.

Don't forget the protocol itself: DeFi platforms have also become more risk-averse. Many platforms have tightened collateral requirements, limited loan amounts, or closed unprofitable liquidity pools. After witnessing the failures of competitors, protocols no longer pursue growth at all costs. This means fewer aggressive incentives and more conservative interest rate models, which again depresses yields.

The Counterattack of Traditional Finance: Why Accept a 3% Yield in DeFi When Government Bond Yields Reach 5%?

Ironically, the yields in traditional finance have started to surpass those of cryptocurrencies. The U.S. Federal Reserve's interest rate hikes in 2023-2024 have pushed the risk-free rate (Treasury yields) to nearly 5%. Suddenly, the boring Treasury bonds that grandmothers buy are outperforming a whole bunch of DeFi liquidity pools! This has completely overturned the situation. The appeal of stablecoin lending lies in the bank offering a 0.1% interest rate, while DeFi pays 8%. However, when Treasury bonds pay a 5% yield with zero risk, the single-digit returns from DeFi seem utterly unattractive after adjusting for risk. Since Treasury yields are higher, why would a rational investor put money into a smart contract with only a 4% return and high risk?

In fact, this gap in yield has led to a significant outflow of funds from the cryptocurrency sector. Large investors have started to allocate capital into safe bonds or money market funds instead of stablecoin farms. Even stablecoin issuers cannot ignore this trend; they have begun to invest their reserves in government bonds to earn substantial returns (which they mostly keep for themselves). As a result, we see a large number of stablecoins idling in wallets, going unnoticed. The opportunity cost of holding stablecoins with a yield of 0% has become enormous, resulting in hundreds of billions of dollars in lost interest. The dollars stored in “cash-only” stablecoin farms are doing nothing, while real-world interest rates are skyrocketing. In short, traditional finance (TradFi) is taking away the business from decentralized finance (DeFi). The yields in DeFi must increase to compete, but without new demand, yields cannot rise. Therefore, funds can only continue to flow out.

Nowadays, Aave or Compound may offer an annual yield of about 4% on USDC (but with various risks), while the yield on one-year U.S. Treasury bonds is comparable or even higher. The harsh reality is that DeFi can no longer compete with TradFi on a risk-adjusted basis. Savvy investors understand this, and unless the situation changes, funds will not rush back in.

Token Issuance Protocol: Unsustainable and About to End

To be honest, many tempting yields are not real from the start. They either come from token inflation, venture capital subsidies, or are outright Ponzi schemes. Such games cannot last forever. By 2022, many protocols had to face reality: in a bear market, you cannot consistently pay a 20% annualized yield without collapsing. We witnessed one protocol after another cutting rewards or shutting down projects due to unsustainability. Liquidity mining activities were reduced; as the treasury was depleted, token incentives were also cut. Some yield farms couldn't even pay out token distributions—funds ran dry, and yield chasers exited the scene.

The prosperity of yield farming has already begun to decline. The protocols that once printed tokens continuously are now struggling to deal with the consequences that followed (token prices have plummeted, and speculative capital has long since vanished).

In fact, the era of rolling in profits has come to an end. Crypto projects can no longer create currency out of thin air to attract users, or they risk destroying token value or incurring the wrath of regulators. With fewer and fewer new “suckers” (ahem, investors) willing to mine and sell tokens, the feedback loop of unsustainable profits has also collapsed. The only profits left today are those truly supported by actual income (transaction fees, interest spreads), and these profits are much smaller in scale. DeFi is being forced to mature, but in the process, its profits have shrunk to realistic levels.

Yield Farming: A Ghost Town

All these factors have combined to make yield farming almost a ghost town. The once bustling mining sites and “speculation” strategies are now a distant past. If you browse today's cryptocurrency Twitter, can you still see anyone bragging about a 1000% annualized return or new mining tokens? Not at all. Instead, what you see are exhausted veterans and those fleeing liquidity crises. The remaining yield opportunities are either negligible and extremely risky (thus ignored by mainstream capital) or unbelievably low. Retail holders either let stablecoins sit idle (yielding zero, but prioritizing safety) or convert them into fiat and invest in off-chain money market funds. Giant whales are either busy making trades to attract the attention of traditional financial institutions or simply holding dollars, showing no interest in participating in the yield game of decentralized finance (DeFi). The result is: DeFi's “farms” are desolate. DeFi is in a winter, and crops cannot grow.

Even though there are still yields available, the atmosphere is completely different. The focus of DeFi protocol promotions has shifted to accessing real-world assets, squeezing out 5% here and 6% there. Essentially, they are building bridges with the traditional financial system—this acknowledges that relying solely on on-chain activities can no longer generate competitive yields. The dream of a self-sustaining cryptocurrency yield universe is shattering. DeFi is gradually realizing that if you want “risk-free” yields, in the end, you will still do like traditional finance (TradFi) does (buying government bonds or other physical assets). And guess what? These yields are at best single digits. DeFi has lost its edge.

So, the reality we face now is: the era of stablecoin yields that we are familiar with has come to an end. A 20% annual yield is just an illusion, and even the days of 8% are long gone. We have to confront a harsh reality: if you want to achieve high returns in the cryptocurrency space now, you either have to take on enormous risks (and bear the corresponding risk of total loss), or you're just chasing an illusory wealth. The average lending rate for DeFi stablecoins is even lower than that of bank fixed deposits. From a risk-adjusted perspective, the yields of DeFi are laughably low compared to other investment methods.

No More Free Lunches in the Crypto World

Let's speak frankly with a typical doomsday tone: the era of easily obtaining stablecoin yields is over. The dream of risk-free returns in DeFi hasn’t been shattered out of thin air, but has been strangled by multiple factors such as market gravity, investor panic, competition from traditional finance, liquidity depletion, unsustainable token economic models, regulatory crackdowns, and the harsh reality. Cryptocurrency has gone through a wild feast of yields, ultimately ending in tragedy. Now, the survivors are struggling to survive in the ruins, barely accepting a 4% yield and calling it a victory.

Is the end of DeFi here? Not necessarily. Innovation always brings new opportunities. However, its essence has undergone fundamental changes. The returns on cryptocurrencies must be based on real value and risk, rather than the illusory internet money. The era of “stablecoin yields as high as 9% because of digital rises” is gone forever. DeFi is no longer a surefire choice for bank account profits; in fact, in many ways, it is even worse.

Choose a thought-provoking question: Will yield farming make a comeback? Or is it just a fleeting gimmick of the zero-interest era? Currently, the outlook seems bleak. Perhaps, if global interest rates decline again, DeFi might shine again by offering higher yields, but even so, trust has already been severely damaged. The sentiment of skepticism is hard to eradicate.

At present, the cryptocurrency community must face a harsh reality: there is no 10% risk-free return in DeFi. If you want to achieve high returns, you must invest in highly volatile projects or complex schemes, which is precisely what stablecoins were originally designed to help you avoid. The intention behind stablecoin yields was to provide a safe and rewarding haven. However, this illusion has been shattered. The market has finally woken up, and “stablecoin savings” is often a euphemism for playing with fire.

Ultimately, perhaps this reflection is beneficial. Eliminating false profits and unsustainable promises may pave the way for more genuinely reasonable and fairly priced investment opportunities. But this is merely a long-term hope. The harsh reality today is that stablecoins still promise stability but no longer promise yields. The cryptocurrency mining market is shrinking, and many former 'miners' have exited. Once yielding double-digit returns, DeFi now struggles to provide returns comparable to government bonds, and with higher risks. The market has taken note of this, and they are voting with their feet (and funds).

As a critical observer, it's hard not to raise sharp questions about this issue: if a revolutionary financial movement can't even outperform your grandmother's bond portfolio, what good is it? DeFi needs to answer this question; otherwise, the sluggish period for stablecoins will continue. The hype has passed, the profits have faded, and perhaps even the tourists have left. What remains is an industry that is forced to confront its own limitations.

At the same time, the notion of “risk-free returns” should be put to rest. It once flourished, but now, returning to reality, the yields on stablecoins are effectively zero. The cryptocurrency world must adapt to the post-pandemic era. Prepare accordingly and do not trust any promises of easy profits. In this market, there is no such thing as a free lunch. The sooner we accept this, the sooner we can rebuild trust, and perhaps one day, we can find returns that are truly earned through our own efforts rather than passively accepted.