The first quarter of 2025 presents a compelling narrative regarding the progression of DeFi. Although yields on major lending platforms have notably decreased, innovation within niche areas of the market reflects the ongoing development and expansion of DeFi.
The Great Yield Compression
Across leading lending platforms, DeFi yields have dropped considerably:
- The vaults.fyi USD benchmark has dipped below 3.1% for the first time since late 2023, falling short of the U.S. 1-month T-bill yield of approximately 4.3%. This benchmark, which is a weighted average of four prominent markets, neared 14% in late 2024.
- Spark has executed four successive rate reductions in just 2025. Starting the year at 12.5%, rates have been cut to 8.75%, then 6.5%, and currently stand at 4.5%.
- Aave’s yields on stablecoins for USDC and USDT on mainnet are approximately 3%, considered disappointing by previous standards.
This yield compression illustrates a market that has cooled substantially from the excitement seen in late 2024, with reduced borrower demand on major platforms.
The TVL Paradox: Growth Despite Lower Yields
- The largest vaults on platforms like Aave, Sky, Ethena, and Compound have nearly quadrupled their size in the past year, growing from about $4 billion to around $15 billion in deposits.
- Even with Spark’s ongoing rate reductions, the TVL has surged more than threefold since the beginning of 2025.
As yields have plummeted from nearly 15% to below 5%, capital has remained resilient. This seemingly paradoxical trend showcases increasing institutional trust in DeFi protocols as credible financial components rather than mere speculative tools.
The Rise of Curators: DeFi’s New Asset Managers
The rise of curators marks a pivotal change in DeFi lending. Protocols such as Morpho and Euler have introduced curators who construct, manage, and optimize lending vaults.
These curators represent a new type of asset manager within DeFi, assessing markets, establishing risk parameters, and fine-tuning capital distribution to yield better returns. Unlike traditional providers who simply advise protocols, curators actively oversee capital management strategies across a variety of lending options.
On platforms like Morpho and Euler, curators manage risk functions: selecting collateral assets, determining suitable loan-to-value ratios, choosing oracle price feeds, and setting supply limits. They develop targeted lending strategies tailored to specific risk-reward profiles, bridging the gap between passive investors and yield sources.
Entities like Gauntlet, once service providers to platforms like Aave or Compound, now directly manage nearly $750 million in TVL across multiple protocols. With performance fees ranging from 0-15%, this could generate millions in annual revenue, providing significantly more potential than traditional service agreements. According to Morpho’s dashboard, curators have already accrued nearly 3 million in revenue and are expected to reach 7.8 million in 2025 based on Q1 revenue.
Successful curator strategies have managed to maintain elevated yields predominantly by accepting higher-yielding collaterals with more aggressive loan-to-value ratios, particularly utilizing Pendle LP tokens. This method entails sophisticated risk management but yields superior returns in the current environment of low yields.
For instance, yields on the largest USDC vaults at Morpho and Euler have surpassed the vaults.fyi benchmark, achieving base yields of 5-8% and inclusive yields with token rewards reaching 6-12%.
Protocol Stratification: A Layered Market
The environment of yield compression has generated a specific market structure:
1. Blue-chip Infrastructure (Aave, Compound, Sky)
- Function similarly to traditional money market funds
- Offer modest yields (2.4-6.5%) with maximum security and liquidity
- Have secured the majority of TVL growth
2. Infrastructure Optimizers & Strategy Providers
- Base Layer Optimizers: Platforms such as Morpho and Euler offer modular infrastructure that enhances capital efficiency
- Strategy Providers: Specialized firms like MEV Capital, Smokehouse, and Gauntlet build on these platforms, facilitating higher yields exceeding 12% on USDC and USDT (as of late March).
This two-tiered relationship fosters a dynamic market where strategy providers can quickly explore yield opportunities without developing core infrastructure. The yields available to users are influenced by both the foundational protocol’s efficiency and the complexity of the strategies employed.
This evolved market structure presents users with a more intricate landscape, where the interaction between protocols and strategies shapes yield potential. While established protocols provide straightforwardness and security, the combination of optimizing protocols and specialized strategies can yield returns comparable to those seen on platforms like Aave or Compound during periods of higher rates.
Chain by Chain: Where Yields Live Now
Despite the emergence of L2s and alternative L1s, the Ethereum mainnet remains home to many of the leading yield opportunities, both with and without token incentives. Ethereum’s continued yield advantage is particularly notable in a landscape where incentive programs have frequently shifted yield-seeking capital to newer chains.
Across mature chains (Ethereum, Arbitrum, Base, Polygon, Optimism), yields are consistently low. Outside of the mainnet, a significant number of appealing yield opportunities are concentrated on Base, indicating its growing status as a secondary yield hub.
Newer chains with considerable incentive schemes (such as Berachain and Sonic) offer elevated yields, but the sustainability of these rates is uncertain as incentives might eventually diminish.
The DeFi Mullet: FinTech in the Front, DeFi in the Back
A key development this quarter was the launch of Bitcoin-collateralized loans on Coinbase powered by Morpho on its Base network. This integration illustrates the emerging “DeFi Mullet” concept—fintech interfaces upfront, with DeFi infrastructure supporting it.
As noted by Coinbase’s head of Consumer Products, Max Branzburg: “This is a moment where we’re planting a flag that Coinbase is coming on-chain, and we’re bringing millions of users with their billions of dollars.” The integration seamlessly incorporates Morpho’s lending functions into Coinbase’s user interface, enabling users to borrow up to $100,000 in USDC against their Bitcoin holdings.
This strategy embodies the belief that billions will ultimately engage with Ethereum and DeFi protocols without even realizing it—similar to how they currently utilize TCP/IP without awareness. Conventional FinTech firms will increasingly embrace this approach, maintaining familiar interfaces while utilizing DeFi’s foundational infrastructure.
The implementation by Coinbase is particularly noteworthy for its complete integration within its ecosystem: users deposit BTC as collateral to create cbBTC (Coinbase’s wrapped Bitcoin on Base) and borrow USDC (Coinbase’s stablecoin) on Morpho (a Coinbase-funded lending protocol) atop Base (Coinbase’s Layer 2 network).
Looking Forward: Catalysts for the Lending Market
Several elements could transform the lending landscape into 2025:
- Democratized curation: As curator models advance, could AI agents in crypto eventually allow everyone to act as their own curator? Though still in its infancy, progress in on-chain automation hints at a future where personalized risk-yield optimization becomes more attainable for retail users.
- RWA integration: The ongoing integration of real-world assets might bring forth new yield sources that are less tied to crypto market cycles.
- Institutional adoption: The growing comfort of institutions with DeFi infrastructure indicates a potential influx of capital that could significantly impact lending dynamics.
- Specialized lending niches: The rise of highly specialized lending markets catering to distinct user requirements beyond simple yield generation.
The protocols that are best positioned to thrive will be those capable of operating effectively across the risk spectrum, catering to both conservative institutional investors and more aggressive yield-seekers through increasingly sophisticated risk management and capital optimization strategies.