State of DeFi Yields | Issue 8

April 30th, 2024

Two notes before the start of Issue 8.

Starting this week, I'm using an average of the top yields to create an effective base rate instead of using a range.
Instead of covering every yield opportunity in depth, I'll be using a Yield Index to highlight all the yield opportunities I reviewed to put together this issue. I'll provide an overview of the top five (5) yield opportunities for stablecoins and ETH, while referencing the ranking in the yield index throughout.

I'll use these two approaches going forward. In the future, I'll publish special editions where I conduct deep dives into certain sectors and topics.

Overview of the Market

The broader crypto has entered the crab phase for now. ETH is down 0.6% and BTC is down 5.3% over the last week. Funding rates for ETH and BTC remain in the single digits, as traders wait for a bullish catalyst to bring the majors back to life.

While attractive yields are available across DeFi, lending rates have dropped from their previous highs. The drop in demand for leverage, aftermath from the ezETH depeg last week, and lower expected yields from Ethena has led to lower rates across the popular lending markets I've covered in previous issues.

This trend coupled with EigenLayer's announcement of the EIGEN token and their incentive Seasons may further decrease demand now that users are able to better gauge the potential value of EigenLayer points. The initial EIGEN announcement was met with significant backlash and confusion.

After reading though the EigenLayer announcements, I've come to the following conclusions:

During Season 1, people who staked ETH or LSTs in EigenLayer OR people who staked through Liquid Restaking Protocols like Etherfi, Renzo, etc. will be able to claim their EIGEN tokens.
- People in the following countries will not be able to claim EIGEN
- If you use a VPN, you will also be prohibited from claiming. EigenLayer is geo-blocking the claims frontend for those in prohibited countries.
Season 1 will distribute 5% of the initial EIGEN supply to those who have earned points, so long as you're not in the above list as a Prohibited Person, and the Claim Window will be open from May 10, 2024 – September 7, 2024 (120 days).
- Season 1 Phase 1: 4.54% of the initial EIGEN supply (75.91M) is allocated and will go to people who staked directly in EigenLayer or people who staked in EigenLayer via LRTs.
- Season 1 Phase 2: 0.46% of the initial EIGEN supply (7.77M) is allocated and will go to people who interacted with EigenLayer in more complex ways (e.g., Pendle, Gearbox v3, etc.). EigenLayer team needs more time to determine points distribution for these folks since it's quite complex.
15% of the initial EIGEN supply is set aside for stakedrops, which means there's another 10% of the EIGEN supply available for stakedrops after Season 1 is complete.
Once claimed, the EIGEN token will not be transferable. EigenLayer seems to be following the strategy that SafeDAO executed with their airdrop and eventual vote to enable token transferability.

If you're a Pendle user or you were farming EigenLayer points through other means beside LRT protocols or by staking directly, you'll be able to claim your EIGEN tokens once the Season 1 Phase 2 allocations are finalized. EigenLayer has said they'll announce this in the future once they map all the users who farmed points through various DeFi protocols.

Since EigenLayer points and LRT points have been a major catalyst for ETH yields in DeFi, it will be interesting to see how the EigenLayer announcement impacts Pendle's Fixed Yield Markets, Points Markets and ETH yields across lending markets.

DeFi's Base Rate, Courtesy of Vaults FYI (29 April 2024)

Base Rate: 13.50% (Average of Above Yields)

Since Issue 7, the average base rate yield has dropped from 26.28% to 13.50%. This is due in part to two factors. One, I'm using the Vaults FYI default view, which filters markets with less than $50M in TVL. And two, we're seeing a sideways market and a drop off in bullishness, as noted by funding rates and lessened demand for leverage.

Let's take a look at lending market yields and trends.

Lending Markets

MakerDAO has changed rates across their vaults, lending markets, and the DAI Savings Rate (DSR), with the DSR moving from 13% to 10%. The Block Analitica Labs team noted the cool down across crypto and broader markets as the reason for the proposed adjustment. This also matches the decline in yields across other lending markets, with the largest lending protocols seeing interest rates ranging from 5–14% for leading stablecoins and 0.50–8% for WETH markets, with the exception of WETH in the Gearbox v3 Arbitrum Passive Earn Market (#20 on the ETH Yield Index).

Aave's outstanding debt is now at $4.49b, down from the peak of $5.3b in early April 2024. While that represents a 15% decline since the peak, outstanding debt is roughly the same as it was in early March 2024.

Stablecoin Lending Rates

Stablecoin Base Rate: 10.33% (Average of Above Yields)

The stablecoin base rate across DeFi lending markets has dropped by 57% in the last two weeks. This matches the broader analysis we've covered so far.

ETH Lending Rates

ETH Base Rate: 2.43% (Average of Above Yields)

Instead of focusing on liquid staking token yields for the ETH base rate, I'm going to calculate the base rate using lending market yields to match the calculation for the stablecoin base rate. Comparing the average from the ETH LST yields in Issue 7, we've seen a 32% decline in yield with the switch the lending market yields.

Yield Opportunities

Given the state of the market and the reduction in outstanding debt across DeFi, the greatest stablecoin yield opportunities remain in the decentralized stablecoin sector, with GHO, HAI, DOLA and fxUSD providing the leading yields. Pendle's Fixed Yield markets provide some of the best ETH-based yields, though the Ethereum Yield Toros Vault tops the list and pxETH LP opportunities round out the field, as well.

While I highlight the top yields, many of the opportunities in the Yield Index below beat the broader base rate and the base rate in each individual sector. Let's take a look at the top five (5) yield opportunities for stablecoins and ETH.

Top 5 Stablecoin-Based Yield Opportunities

The five leading stablecoin yield opportunities provide yields ranging from 34–53% above the stablecoin base rate of 10.33%.

1) GHO-USDT-USDC Leveraged Vault on Notional Finance v3

Current APY: 63.34% with 10,000 USDC in size

Notional Finance v3 leads the stablecoin Yield Index this week with their Leveraged GHO-USDT-USDC Vault, which farms yield in Aura Finance on top of the Balancer v2 LP. With this strategy, you can deposit USDC, borrow USDC from lenders on Notional at a fixed rate, and farm yields with up to 7.14x leverage. You would be earning yield in the form of trading fees plus BAL and AURA incentives.

This strategy involves leverage, so be sure to do a little research before aping in. If you haven't used leverage before, I would advise you to take advantage of one of the simpler GHO strategies.

Smart contract coverage available:

Notional v3 Protocol Cover. Protection against smart contract risk within Notional Finance v3's smart contracts.
Aura Finance Protocol Cover. Protection against smart contract risk within Aura Finance's smart contracts.
Balancer v2 Protocol Cover. Protection against smart contract risk within Balancer v2's smart contracts.

2) GHO-USDC Maverick Boosted Pool

Current APR: 54.86%

The GHO Liquidity Committee has been adding incentives to strengthen GHO's peg, while boosting GHO liquidity across DeFi. The GHO-USDC #111 Boosted Pool on Maverick holds the second place spot on the stablecoin Yield Index this week with yields 40%+ above the stablecoin base rate. Maverick LPs in this pool can earn high GHO incentives, as well as higher yields as more volume is routed through this Maverick boosted pool.

Smart contract coverage available:

Maverick Protocol Cover. Protection against smart contract risk within the Maverick protocol.

3) HAI-LUSD sLP on Velodrome

Current APR: 48.65%

Let's Get HAI, an authorized Reflexer Finance fork created to include LSTs and long-tail assets as collateral, has been working with the DeFi Collective to provide incentives on Velodrome and boost HAI liquidity on Optimism. The HAI-LUSD sLP comes in third place on this week's stablecoin Yield Index with yields 38%+ above the stablecoin base rate. For those looking to borrow a stablecoin against WETH, wstETH, or OP, Let's Get HAI offers some of the lowest borrow rates on Optimism. Whether you borrow HAI or swap for it on Velodrome, you can earn HAI stablecoin yields on Velodrome in the HAI-LUSD pool.

Smart contract coverage available:

Velodrome Protocol Cover. Protection against smart contract risk within the Velodrome protocol.

4) DOLA-fxUSD on Convex Finance

Source: Convex UI for f(x) Protocol Curve LPs

Current APR: 46.37%

The f(x) Protocol's campaign to boost fxUSD liquidity within the Curve ecosystem continues to provide great yields, which locks in the DOLA/fxUSD Curve LP staked through Convex Finance as the fourth place spot on this week's stablecoin Yield Index.

Smart contract coverage available:

fx Protocol + Curve + Convex Bundled Protocol Cover. Protection against smart contract risk across all three protocols bundled into one Cover NFT.

5) USDC in the Hyperliquidity Provider Vault on Hyperliquid

Current APR: 45.00%

Hyperliquid, the decentralized perpetuals market on Arbitrum, rounds out the number five spot on this week's stablecoin Yield Index with the Hyperliquidity Provider (HLP) Vault. The HLP Vault runs a marketing making strategy, conducts liquidations and receives a portion of trading fees. By depositing into the HLP Vault, you can earn 45% vAPR on USDC. The vault does have a lockup period, which means that you won't be able to withdraw your USDC until four (4) days after your initial deposit. Learn more about the HLP Vault in the Hyperliquid docs.

Smart contract coverage available:

Hyperliquid Protocol Cover. Protection against smart contract risk within the Hyperliquid protocol.

Top 5 ETH-Based Yield Opportunities

The five leading ETH yield opportunities provide yields ranging from 26–34% above the ETH base rate of 2.34%.

1) Ethereum Yield Toros Finance Vault

Current APY: 37.06%

The Toros Finance Ethereum Yield (ETHy) Vault on Base tops the ETH Yield Index this week, with an annualized APY of over 37% based on the last month of performance. This vault, which is built on dHedge smart contracts, runs an underlying strategy in the Aerodrome WETH-USDC sLP and the Aave v3 Base market. The vault amplifies yield on ETH, by directly providing liquidity to the Aerodrome WETH-USDC pool or by leveraging borrowed assets to boost yields for depositors.

Smart contract coverage available:

dHedge Protocol Cover. Protection against smart contract risk within the dHedge protocol.

2) eETH (Zircuit) Pendle Fixed Yield (58 days left in maturity)

Current APY: 33.51%

The Fixed Yield Market still provides high yields on ETH, which is why the eETH (Zircuit) Fixed Yield opportunity is in the number two spot on this week's ETH Yield Index. eETH holders who have staked in the Zircuit contract on Ethereum can deposit their LRTs into this market to sell their yield and points to others in the Points Trading market. This market offers a fixed 33.51% APY for the next 58 days. There is another Pendle market in the top five ETH yields this week, with the rest of the Pendle yield opportunities highlighted in the ETH Yield Index.

Smart contract coverage available:

Etherfi (Zircuit) Pendle Bundled Protocol Cover. Protection against smart contract risk across EigenLayer, Etherfi, and Pendle protocols plus the Zircuit staking contract bundled into one Cover NFT.

3) pxETH-WETH on Aura Finance

Current APR: 31.57%

The Dinero team has been adding incentives for the pxETH token, an ETH-pegged asset that can earn high yields across DeFi. The pxETH/wETH Aura Finance pool offers LPs 31.57% vAPR in trading fees, AURA, and BAL rewards. This pool has provided relatively consistent yields above this week's ETH base rate and the LST base rate. Learn more about pxETH in the Dinero docs.

Smart contract coverage available:

Aura Protocol Cover. Protection against smart contract risk within the Aura Finance protocol.
Balancer v2 Protocol Cover. Protection against smart contract risk within the Balancer v2 protocol.

4) uniETH (Bedrock) Pendle Fixed Yield (58 days left in maturity)

Current APY: 30.22%

The Bedrock uniETH Fixed Yield Market on Pendle has been among the top yield opportunities in past weeks and comes in at four on this week's ETH Yield Index. If you're willing to sell the yield and points associated with your uniETH, you can lock in over 30% for the next 58 days in this market.

Smart contract coverage available:

Pendle Protocol Cover. Protection against smart contract risk within the Pendle Finance protocol.

5) pxETH-WETH on Arrakis Finance

Current APR: 29.27%

The last spot on this week's ETH Yield Index is held by the pxETH/wETH concentrated liquidity pool on Arrakis, which manages the pxETH/wETH LP on Uniswap v3 by providing liquidity in a tight range to maximize yield for depositors.

DeFi Risk Report

Over the last two weeks, we've seen one major exploit. Hedgey Finance, a token vesting protocol, suffered an exploit for more than $44m on April 19th. As the market pulls back, please be mindful of smart contract risk if you're active in DeFi.

Though smart contract risk is ever present onchain, the ezETH depeg and subsequent liquidations across the Gauntlet Morpho Blue lending markets was the most widely discussed risk event in the last two weeks. The Renzo team shared an announcement on April 23rd about the launch of the REZ token, which included a pie chart highlighting the token allocations. Many users pointed out the pie chart was misleading and many ezETH holders were upset with the 65% collective allocation to the Foundation, Core Contributors, and Investors. After people read the announcement, crypto Twitter lit up like a roman candle. This negative sentiment gave way to people selling their ezETH into the open market, which had limited liquidity.

The sell pressure across the Balancer v2, Curve, Uniswap and other markets led to a depeg of the ezETH token, which triggered liquidations across lending protocols that had listed ezETH as collateral. Liquidations occurred across Gauntlet Morpho LRT Core Markets, Gearbox v3, and Notional Finance v3, which led to a greater depeg of ezETH. During the depeg event, ezETH went as low as 0.5 ETH per 1 ezETH. For a good recap of this event, see CurveCap's review of the ezETH depeg event.

Illiquidity Risk of LRTs

When yields are high and the market is hot, people tend to focus more on the rewards than the risks. The majority of LRT protocols did not have withdrawals enabled before the ezETH depeg event. To my knowledge, Ether.fi was the only LRT protocol that had withdrawals enabled. If you were depositing into KelpDAO, Renzo, Swell, etc., you were able to farm points and earn yield but you also took on illiquidity risk. In February 2024, Puffer Finance's pufETH depegged to 0.92 ETH per 1 pufETH, so at least one major LRT depeg occurred before the ezETH depeg event.

While LRT protocols have been incentivizing liquidity for their tokens, the available onchain liquidity vs. the amount of LRTs in circulation is relatively small, which creates the same illiquidity risk we saw with LSTs before withdrawals were enabled after the merge. During this time, stETH depegged and this created risk across DeFi lending markets were users were looping wstETH-to-WETH-to-wstETH to farm yields. A cascade of liquidations could have wiped out onchain liquidity and created bad debt in lending markets. Fortunately, this didn't happen and withdrawals were enabled, which allowed people to redeem their stETH for ETH.

Having withdrawals enabled for ezETH would have given those unhappy with the REZ token allocation an option to redeem their ezETH for ETH. It's likely this would have prevented the depeg event, though the seven day withdrawal period for EigenLayer deposits could have created the potential for a depeg event.

Since the ezETH depeg, the Renzo team announced they would be enabling withdrawals. Renzo also shared an updated token allocation plan after the community provided feedback. Other LRT protocols, like KelpDAO, also announced they would enable withdrawals. The Ether.fi account took the opportunity to poke some fun at the Renzo team's pie chart skills on Twitter, as well.

Impact on Lending Markets

Chaos Labs provided a great overview of the depeg event. They noted that Chainlink and Redstone oracles both updated in a timely fashion. However, because the depeg happened in such a short time, the updated prices were materially different (~9% in one update). While no bad debt accrued on Gearbox v3 or Notional Finance, the Gauntlet LRT Core Morpho Blue Market did accrue 10.96 WETH in the ezETH/WETH 0.86 LTV market, which was socialized among lenders, per Gauntlet's update. In Morpho Blue, bad debt is socialized among lenders in a given isolated market if it accrues.

Borrowers in the ezETH/WETH Gauntlet Markets were upset in the aftermath because their positions were entirely or nearly wiped out due to the liquidation penalty in these markets. Unfortunately, this is a risk of using leverage for assets that have illiquidity risk in the market, though there is an argument that the supply cap should have been managed to reflect available liquidity onchain. Gauntlet caught a lot of flak during the depeg event, and the Aave-Morpho feud continued throughout this event.

Since the depeg, WETH lenders in Gauntlet's LRT Core MetaMorpho Vault are unable to withdraw because utilization across the three ezETH/WETH markets is at 100%. Some lenders are unhappy about the interest rate curve model in Morpho, which is slow to ramp up during this period of high utilization. The interest rate will rise over time, per the Morpho IR model, but it may be a week or more before borrowers begin paying back debt to provide liquidity to lenders in this market. The lower interest rate vs. the potential yield they can earn doesn’t create a great enough incentive to payback loans, or at least that’s what lenders are arguing. Gauntlet has responded to this criticism with their analysis of the market performance and Morpho's IR model.

This back-and-forth about Gauntlet's LRT Core Market on Morpho is a great reminder about various risks DeFi lenders are open to:

illiquidity risk in the event of liquidations
illiquidity risk for lent capital when utilization is high
Potential for bad debt if liquidations can't happen in a timely fashion or if oracles can't update as quickly as prices drop within the market

Be sure you understand the risks before lending your capital in DeFi, friends.

Takeaways for this Week's DeFi Yields Report

The market is in an uncertain place, with the SEC investigating multiple major DeFi companies and protocols. There's skepticism that the ETH ETF will be approved in May 2024 and low funding rates reflect the drop in bullishness across the market. I'll continue to search for yields while great opportunities exist even if the market continues to crab or begins to move lower.

Smart contract and market risk is ever present, so I encourage readers to evaluate the risks when you're farming yields. Many who have been farming EigenLayer points are upset about the non-transferability provision in the airdrop announcement, since that hurts farmers' bottom line. This is also a good reminder that airdrops are speculative events and you should exercise caution farming these airdrops. Most LRT protocols have announced their airdrops at this point, so there's more clarity on token allocations going forward. I'm interested to see how these announcements influence yield opportunities on Pendle in the coming weeks.

Fortunately for us, there are still great opportunities to farm with your ETH and stablecoins across DeFi. I hope the new format for the State of DeFi Yields report helps you evaluate where to find yields in DeFi, so you can do your own research to find opportunities that work for you. Just be sure to protect yourself against smart contract risk when you're earning DeFi yields.

Protocol Cover from Nexus Mutual and OpenCover both provide an easy way to mitigate smart contract risk across DeFi. To date, Nexus Mutual has paid over $18m in claims to people impacted by onchain losses.

Yield is everywhere around us. You just need to reach out and grab it without losing your balance and dropping your bag. I'll be back next week with an updated look at the state of DeFi yields.

Until next time, stay safe out there and enjoy the Yield Index below.

Yield Index

Below is an aggregate view of all the yield opportunities I reviewed when putting together Issue 8. Going forward, I'll use the Yield Index section to highlight all the yields reviewed.

Stablecoin Yield Index

ETH Yield Index

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