Incentives and Durability: Are Crypto's Yield Farms Sustainable?

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Market Overview

Markets turned risk-off, with BTC dropping below $86,000, underperforming both equities and gold ahead of a busy week for economic data. Despite the market downturn, there were small pockets of outperformance, with AAVE pushing the Lending and Ethereum Eco indices higher.

On the macro side, investors are positioned cautiously ahead of a busy slate of economic data in the last full trading week of the year for stocks. Both October and November nonfarm payrolls are due, given October’s report was pushed back by the US government shutdown earlier this quarter.

Meanwhile, speculation over Powell’s successor has intensified ahead of his term ending in May 2026. Investors expect a more dovish Fed under new leadership, leading to further rate cuts next year.

Regarding cross-sector performance, the Lending (+2.8%) and Ethereum Eco (+2.6%) indices showed remarkable relative strength against the broader market downturn. AAVE (+3.0%) was the best performing asset in both indices.

The Consolidation Theme: M&A and Broken Tokens

A defining theme for crypto in 2026 will be consolidation, with sectors coalescing around a handful of main players. Crypto M&A deal activity has accelerated over the past year. Per RootData, there have been 143 crypto M&A deals so far in 2025, though only 21 have disclosed the acquisition amount, with the most notable being Dunamu’s $10.3 billion acquisition by a major tech company.

Although consolidation points to a maturing industry, a critical issue has emerged: tokens are broken, and most remain uninvestable. Recent acquisitions—including those by major exchanges and payment platforms—have neglected token holders entirely, with some only acknowledging token communities after backlash.

This is the problem projects like MetaDAO are attempting to fix. MetaDAO embeds mechanistic protections into tokens, with holders able to submit a treasury clawback proposal as a last resort. Other projects are taking different approaches: what if instead of fixing tokens, we bring equities and primary capital formation onchain? Platforms are now enabling SEC-registered issuers to receive stablecoins directly and issue tokenized shares instantly to investors’ wallets.

Ultimately, investors should care whether an instrument conveys a claim on cash flows, assets, and legal recourse—whether it’s a token or a tokenized stock. Both approaches will coexist and play a fundamental role in 2026 and beyond as onchain markets mature.

The Incentive Question: Is Demand Durable?

Incentives, airdrops, and points farming have remained durable features of the crypto user experience. For users, they can be lucrative. For projects, token incentives offer a non-cash expense for customer acquisition. But eventually, the “community rewards” budget of the token allocation will be exhausted, leaving the market to determine the viability of the financial product absent incentives.

Case Study: USDe and Pendle

Looking back at the USDe market on Pendle for the Sep. 25 maturity, this market collected a 70x sats boost. Despite zero underlying yield on the instrument, the implied yield on this market rose to over 16%, and amassed over $3 billion in deposits.

Users could collect a 10-15% fixed yield on USDe related PTs and loop them on major lending protocols with a borrow cost of 5-7%, all with billions of dollars in liquidity. Between the USDe and sUSDe markets on Pendle, this structure drove the USDe from $5 billion up toward $15 billion. Following the September maturity of over $5 billion in USDe-related instruments and the end of incentive campaigns, coupled with market volatility and the decline in funding rates, the supply of USDe contracted back to $6.8 billion.

Case Study: Kinetiq’s kHYPE

More recently, Kinetiq’s kHYPE garnered significant deposits in advance of the airdrop. Pendle’s market for kHYPE priced the yield as high as 15%, on an underlying base staking yield of only 2-3%. This market amassed over 40% of the total kHYPE supply, growing into Pendle’s second-largest listing.

Users could buy the kHYPE PT at a ~10% fixed yield and loop it against lending protocols with a 2-3% cost to borrow. However, post-November TGE and the expiration of this hot Pendle maturity, the kHYPE supply has contracted by 40%.

Case Study: USD.AI

USD.AI, which aggregates onchain stablecoin suppliers to lend capital for GPU financing, has added over $600 million in deposits in short order. While running a points campaign with deposits capped, exposure to the airdrop has been so in-demand that participants blocked due to the cap bid up the stablecoin above peg by $0.04.

USD.AI markets on Pendle have been putting up the best stablecoin yields in an otherwise boring stablecoin-farming market. Looking at the USD.AI market on Pendle for the March maturity, the implied yield launched at around 30%, and has since drifted lower toward 10%, while the underlying yield pays nothing. Over 80% of the USDai supply has been utilized on Pendle.

Are these yields sustainable? When the incentives end and TGE comes, the platform will be left paying out the yield from its loan book, which currently stands under $1 million. Absent growth in its loans by at least 200x, the underlying APY may fail to maintain the appeal that the over $600 million in deposits enjoys currently.

Conclusion

Although lucrative for users and effective for protocols in solving their cold start problem, incentives are transient and not durable features of any particular financial product. While points farming is an ever-present feature of the onchain economy, capital will always rotate to the latest and greatest risk-adjusted return.