The State of DeFi Yields newsletter is back from its long summer hiatus! I apologize for the gap between issues, friends. Over the summer, I stepped into a new role at Nexus Mutual as Head of Product & Risk, which has kept me quite busy.

Fortunately, I'm adjusting to my new workflow and schedule. I plan on resuming a weekly publication of this newsletter. I'll be publishing on Mirror and Substack going forward, as well.

If you're an existing subscriber, welcome back, and If this is your first time reading, welcome to the State of DeFi Yields Newsletter!

Market Overview

I remember reading in May that once the ETH ETFs received their S-1 approval, we would see ETH hit new all-time highs, with price targets ranging from $6,000 to $15,000. I, too, held this sunny optimism that we'd see positive price action in the month or so after the ETH ETFs launched. Alas, the market had other plans.

In the last month, ETH's price has fallen by 12.3%. In late August, we saw the price climb above $2,800 and subsequently drop a few steps down to the current $2,000-to-$2,300 range. Price action has largely been sideways since then. Traders aren't feeling the bullish vibes yet either, as ETH funding rates range between 2-12% on major exchanges, with the average on the lower end of that spectrum. There are onchain markets paying traders to go long, which means ample arbitrage opportunities are out there if you keep your eyes peeled.

I've seen people point fingers every which way trying to identify the central reason behind this bearish slump. In my opinion, it seems fairly simple: traditional markets have seen a correction in the last month and crypto markets are still correlated to TradFi markets. Gas fees on Ethereum mainnet have been low for longer than any period I've witnessed since DeFi Summer kicked off in 2020. Activity across DeFi has shifted to Layer 2s but overall, there's less activity onchain than previously in this and past cycles. DeFi isn't drawing people in like it has before and the current Onchain Base Rate reflects the lack of incentives for funds and high net worth individuals.

Onchain Base Rate

• Current Onchain Base Rate: 4.68%

• DAI Savings Rate (DSR): 6.00%

This week, I calculated the base rate by taking the total yield (in USD) divided by the total TVL held in major lending markets, with a minimum requirement of $450,000 in TVL within a single market (Source: DefiLlama Yields). With $1.88B in TVL and $88.4M in annualized yield based on aggregate rates, the Onchain Base Rate sits at 4.68% this week.

Compare this to the DSR (6.00%) and United States Treasury yields (3M UST: 4.86% | 6M UST: 4.59% | 12M UST: 3.96%)—it's clear that yields in traditional markets are still competitive with onchain yields. When you factor in the risk premium that comes with crypto assets and DeFi protocols, it may still be attractive for less sophisticated funds and family offices to stay in TradFi markets until onchain yields pick up.

Individual lending markets offer yields higher than the Onchain Base Rate, but lenders earn variable yields in most markets. Great yield opportunities still exist onchain. However, they require using leverage in many cases and involve recursive strategies.

Now, let's dive into the notable yields this week and honorable mentions. From there, we'll talk about recent updates in the major onchain lending markets.

Noteable Yields

I've picked out a variety of different yield sources and provided a brief description below. All data was sourced from the DefiLlama Yields page.

Uniswap v3 (Ethereum) | EZETH-WETH (0.01%) Pool

30-Day Avg APY: 31.70%

Lately, I've been acting as a liquidity provider on Uniswap v3 and taking advantage of closely correlated pairs to reduce the potential for impermanent loss (IL). While I'm not in this pool, it has an attractive 30-day average for an ETH-based LP. Because ezETH grows in value, you are slowly selling into WETH over time, but theoretically the trading fees should offset any IL created by ezETH's value accrual.

Extra Finance (Base) | DOLA-USDC

Projected APR: 28.7%

If you're active on Base, Extra Finance provides many great yield opportunities. The DOLA-USDC Aerodrome farm can earn you a double-digit APR after borrowing costs are taken into account (the APR above does factor in lending costs). There's little chance of IL, though you take on the risk of a depeg for either asset. If you want to deposit collateral and borrow DOLA, you can borrow DOLA in Inverse Finance's FiRM market on Ethereum for a fixed 4.24%, as well. Or you can simply swap for DOLA and pair it with USDC to jump in this leveraged farm on Base.

Worried about smart contract and economic risk in the Extra Finance markets? You can buy Extra Finance Protocol Cover from OpenCover or request to join their open beta period for the Base DeFi Pass, all-in-one protection across Extra Finance and several other DeFi protocols on Base that's priced at just 3.99%.

Morpho + Morpho Vaults (Ethereum) | LeadBlock USDC RWA Vault

Projected APY: 23.14% + MORPHO rewards

LeadBlock's USDC RWA Vault allocates to the USD0++, MKR, PAXG, USD0USD0++, WBTC, and mTBILL markets to generate high yields for USDC lenders in this vault on Ethereum. The vast majority of USDC is allocated to the USD0+ market.

Worried about smart contract and economic risk in this vault and the underlying Morpho markets? You can buy Morpho + Morpho Vaults Bundled Protocol Cover from Nexus Mutual.

Uniswap v3 (Ethereum) | SUSDE-USDT (0.05%) Pool

30-Day Avg APY: 20.26%

Another closely correlated Uniswap v3 pool that offers attractive stablecoin yields well above the DSR and Onchain Base Rate. While SUSDE yields are low, you can still earn shards (Ethena's version of points) and generate good yield in this LP with low potential for IL.

Morpho + Morpho Vaults (Ethereum) | MEV Capital Elixir USDC Vault

Projected APY: 18.56% + MORPHO rewards

The MEV Capital Elixir USDC Vault is seeing higher adoption as people leverage farm Elixir potions (i.e., points). While this yield won't last forever, there is potential for great yields during the Elixir potions campaign seems certain.

Worried about smart contract and economic risk in this vault and the underlying Morpho markets? You can buy Morpho + Morpho Vaults Bundled Protocol Cover from Nexus Mutual.

Contango (Base) | wstETH on Morpho

Projected APY: 17.60%

Contango is built to make recursive looping strategies as easy as possible. That means it involves leverage, but your borrowed assets are being deposited back as collateral to maximize the yield. The wstETH Morpho strategy on Base is netting more than 17% at the moment, though available capacity for yields this high can get snapped up quickly.

Worried about smart contract and economic risk on Contango and the underlying Morpho markets? You can buy Contango + Morpho Bundled Protocol Cover from OpenCover.

Extra Finance (Base) | DOLA or USDC

DOLA Projected APY: 12.47%

Acting as a DOLA lender on Extra Finance pays more than 12% right now. Very nice yield for a stablecoin asset.

USDC Projected APY: 9.23%

If you're not keen on holding DOLA and want a stablecoin that's familiar but can earn you yields above the DSR and Onchain Base Rate, you can lend USDC on Extra Finance and clear more than 9%.

Worried about smart contract and economic risk in the Extra Finance markets? You can buy Extra Finance Protocol Cover from OpenCover or request to join their open beta period for the Base DeFi Pass, all-in-one protection across Extra Finance and several other DeFi protocols on Base that's priced at just 3.99%.

Morpho + Morpho Vaults (Base) | Morpho eUSD Vault

Projected APY: 12.46% + MORPHO rewards

Re7 manages this vault and allocates capital to markets that support the Reserve ecosystem on Base. Depositing eUSD as a lender can net you over 12% in yield, which is quite nice for Base.

Worried about smart contract and economic risk in this vault and the underlying Morpho markets? You can buy Morpho + Morpho Vaults Bundled Protocol Cover from Nexus Mutual or request to join OpenCover’s open beta period for the Base DeFi Pass, all-in-one protection across Morpho and several other DeFi protocols on Base that's priced at just 3.99%.

Contango (Optimism) | wstETH on Aave v3

Projected APY: 2.23% + 11.46% in OP rewards

The wstETH Aave v3 recursive strategy is earning 13.69% for users on Contango. Not too shabby.

Worried about smart contract and economic risk on Contango and the underlying Aave v3 market? You can buy Contango + Aave v3 Bundled Protocol Cover from OpenCover.

Contango (Ethereum) | rsETH on Compound v3

Projected APY: 10.26% + 2.50% in COMP rewards

The rsETH Compound v3 recursive strategy nets a touch less yield and comes in for a total of 12.76% but you get the EigenLayer points, as well.

Worried about smart contract and economic risk on Contango and the underlying Compound v3 market? You can buy Contango + Compound v3 Bundled Protocol Cover from OpenCover.

DeFi Risk Updates

While this summer has seen less volume in exploits, we've seen an uptick in the month of September, with the $27M Penpie exploit caused by a reentrancy attack and the $5.98M DeltaPrime hack on Arbitrum caused by a compromised EOA that had control over a proxy contract, which allowed the attacker to change ownership of the contracts and drain funds.

Mitchell Amador, the CEO of Immunefi, wrote an indepth article on X breaking down the true cost of onchains hacks from 2021 to 2023. I highly recommend reading it. Amador writes that, on average, a hack will cost a protocol $16M in direct losses, 52% of a protocol's marketcap in the months that follow along with depressed token prices for 6-12 months after a hack. While the $16M figure is an average, sophisticated attacks are usually 10x higher or greater. During my salad days at Nexus Mutual before I was a full-time contributor, I put together a similar report that covered 2020 to 2021. My findings were quite close to Amadors, though I've since learned an exploit can destroy a protocol's future and cause devastating losses for depositors.

No matter how long you've been in the space, you can still be affected by a hack. Unfortunately, Lefteris and Rotki were impacted by the DeltaPrime hack. Lefteris is a legend and the founder behind Rotki, an onchain portfolio tracker I myself use for both its accuracy and its commitment to individual privacy.

Just a reminder to be safe out there when you're deploying funds onchain. If you have the opportunity to buy cover, it's the most cost effective way to protect yourself against a hack/exploit. You can join Nexus Mutual as a member or use OpenCover, a KYC-free platform built on top of Nexus Mutual that allows you to buy cover on L2s.

Review of Onchain Lending Markets

In DeFi, the lending sector is where all the innovation is happening. In the last several weeks, the largest protocol teams have announced major developments and initiatives, including MakerDAO's rebrand to Sky Money.

Aave v3

AaveDAO service providers have been shipping! In the last several months, announcements about a major overhaul of the Safety Module (Umbrella), a temp check to begin building the GHO Stability Module (GSM) which would support an integration into BlackRock's BUIDL platform, and an updated version of Aave (v3.2) that will remove the previously deprecated stable rate logic and introduce Liquid eModes.

With Liquid eModes, Aave will be able to add isolated markets for specific assets, which allows them to add less mature assets (e.g., new stablecoins, LSTs, LRTs, etc.), offer higher LTV, and further minimize risk across their markets. These isolated markets can be deployed in one instance of Aave v3.2 instead of deploying separate instances for new markets like AaveDAO has done with the Lido and Etherfi markets (and may do with a Crypto.com instance, if the proposal makes it through the governance process).

The Aave Chan Initiative (ACI) has proposed onboarding cbBTC (Ethereum and Base) and tBTC (Ethereum) to the respective Aave markets. This comes after the discussion regarding BitGo's August update that WBTC will be going into business with Justin Sun. Many lending protocols have discussed WBTC's status as collateral in their markets, but AaveDAO has not yet decided on WBTC's fate as collateral on Aave yet.

The ACI has also proposed onboarding USDS and sUSDS, Sky Money's new stablecoin and yield-bearing stablecoin, in the Aave markets. Sky Money (formerly MakerDAO) is providing incentives to early integrators, so there are monetary benefits to adding USDS to Aave v3, but this also represents a shift in the relationship between AaveDAO service providers and the Sky Money community.

In the not-too-distant past, Sky Money's decision to fork Aave v3 to create Spark (an Aave v3 competitor focused on boosting DAI adoption) created tension between the two DAOs, especially when the revenue share agreement was roundly criticized. Sky Money's decision to take on sizable exposure to Ethena's USDe and sUSDe nearly resulted in DAI being offboarded from Aave v3, as well. It's great to see a renewed partnership between these two protocols.

Of course, Aave is the market leader by a wide margin at this point with $11.15B in TVL: that's 2.83x the TVL of MakerDAO, 4.94x the TVL of Spark, 5.87x the TVL of Compound, and 8.16x the TVL of Morpho (Source: DefiLlama).

While the lending rates across the Aave v3 instances are less than the DSR benchmark and, in most cases, less than the Onchain Base Rate, the borrow rates for stablecoins are notably less than lending rates in TradFi markets. Borrowing against crypto assets onchain is more affordable than heading to the bank for a personal loan right now. This phenomenon won't last forever, so enjoy it while we wait for greater onchain adoption.

Morpho

Recently, Morpho went through a slight rebrand: they've moved away from the Morpho Blue and MetaMorpho name and cut it down to Morpho and Morpho Vaults, a change I'm fond of. The Morpho markets on Ethereum and Base are seeing greater adoption by more institutions and funds, with higher yields available for lenders depositing into the Morpho Vaults.

In fact, there are 18 Morpho Vaults on Ethereum with Net APYs higher than the Onchain Base Rate, and 11 Morpho Vaults with Net APYs higher than the DSR. While Morpho markets are isolated and don't employ the peer-to-pool model, Morpho Vaults act as a pool of capital that can be managed and allocated by risk curators to markets where the highest demand/yield is available.

Four (4) of the leading Morpho Vaults on Ethereum are:

1. MEV Capital Elixir USDC: 17.60% APY + 52.93 MORPHO. This vault is curated by MEV Capital and focuses on supplying liquidity to Elixir protocol markets. It has exposure to the deUSD/USDC, WBTC/USDC, and wstETH/UDSC Morpho markets.

2. Gauntlet eUSD Core: 11.59% APY + 52.92 MORPHO. This vault is curated by Gauntlet and whitelists a range of liquid collateral markets. Gauntlet continuously optimizes for risk-adjusted yield across those collateral markets. It has exposure to the wstETH/eUSD, WBTC/eUSD, and ETH+ /eUSD markets.

3. LlamaRisk crvUSD Vault: 9.80% APY + 52.92 MORPHO. This vault is curated by LlamaRisk and focuses on whitelisting a range of Convex-wrapped Curve LPs as collateral types. LlamaRisk continuously optimizes for risk-adjusted yield across those markets. It has exposure to the Curve TryLSD LP/crvUSD, Curve TricryptoLLAMA LP/crvUSD, Curve TriCRV LP/crvUSD, Curve TricryptoUSDC LP/crvUSD, Curve TricryptoUSDT LP/crvUSD, and Curve tBTC WBTC LP/crvUSD markets.

4. f(x) Protocol Morpho USDC: 9.56% APY + 52.93 MORPHO. The vault is curated by Re7 Labs and focuses on lending against assets in the f(x) protocol ecosystem in partnership with Aladdin DAO. It has exposure to the arUSD/USDC market.

While Aave announced the BlackRock BUIDL infrastructure integration with the GSM, Morpho announced the addition of new Morpho Vaults and Morpho markets that use Coinbase attestations that allow real world assets as collateral for USDC-based loans. These markets accept Centrifuge Anemoy's Liquid Treasury Fund (LTF), MidasRWA's Short Term US Treasuries (mTBILL) and Hashnote's US Yield Coin (USYC) as collateral. With these vaults, Morpho can now support permissioned vaults where only certain users can act as borrowers and lenders. This is a big step forward for onchain lending markets and an impressive development for the Morpho ecosystem.

In other vault news, Block Analitica and B.Protocol announced that they would support cbBTC in the Flagship USDC and Flagship ETH vaults. This development is in-step with Block Analitica and B.Protocol's decision to reduce exposure to WBTC across their Morpho Vaults due to the change in ownership of the WBTC product.

On Base, the Block Analitica/B.Protocol Moonwell Flagship ETH, Gauntlet USDC Core, Gauntlet USDC Prime, and Steakhouse USDC vaults have allocated USDC to on cbBTC/USDC market that uses the Chainlink BTC/USD oracle, which assumes the cbBTC price won't deviate significantly from the BTC price. On Ethereum, there are vaults that also use a cbBTC/USDC market with the Chainlink BTC/USD set as the oracle: Steakhouse USDC, Gauntlet USDC Core, Gauntlet USDC Prime, Block Analitica/B.Protocol Flagship USDC. The decision to use this particular oracle was criticized by Togbe, and others, on X.

Sky Money and Aave may be mending fences, but the Aave <> Morpho feud burns on.

Euler v2

Earlier this month, Euler v2 launched on Ethereum. It's been more than a year since Euler v1 suffered a hack and subsequently negotiated a return of all the funds. Their team focused on rebuilding the protocol back better than ever, and the result is astounding.

While Aave and Morpho have taken different paths and approaches, the Euler team has created a protocol that asks, "Why not both?". Euler v2 is a permissionless marketplace made up of ERC-4626 vaults that use a custom-build vault development kit called the Euler Vault Kit (EVK). The EVK supports four core vault-types:

• Escrowed Collateral Vaults. Users can deposit assets into escrow vaults and use those deposit tokens as collateral in other vaults (e.g., governed and ungoverned vaults) to take out loans. Users won't earn interest on deposits in escrow vaults because their deposits in the escrow vault can't be borrowed. Escrow vaults allow users to borrow against collateral without taking on illiquidity risk when they want to withdraw, which is the same approach taken in Compound v3.

• Governed Vaults. Users can deposit assets into this vault and act as lenders and borrowers. Depositors can earn interest on their collateral when borrowing against it. Governed vaults are managed by a DAO or risk manager that is responsible for adjusting the interest rates, loan-to-value, and other risk parameters, as well as reacting to changes in risk. Governed vaults use a similar approach to what is done within the AaveDAO and other governed lending protocols.

• Ungoverned Vaults. Users can deposit assets into this vault and act as lenders and borrowers. Depositors can earn interest on their collateral when borrowing against it. However, ungoverned vaults are immutable: there's no risk manager and the parameters can't be updated. Ungoverned vaults use a similar approach to Morpho.

• Yield Aggregator Vaults. This is a special class of governed vault. Users can deposit into a yield aggregator vault to passively lend and earn on their assets. These assets can be allocated by the vault governor to any underlying ERC4626 vault, including both ungoverned or governed Euler vaults, but also external vaults like sUSDS. Yield aggregator vaults take a similar approach to Morpho Vaults or to Yearn Vaults.

All of these vaults can be connected using Euler's Ethereum Vault Connector (EVC), which comes with a wealth of features. There are many more innovations you can read about in the Euler documentation, but I'm excited to see Euler re-emerge from the ashes and grow their protocol. Their team has built the Swiss army knife of lending protocols, and the flexibility offered within Euler allows for numerous different use cases. The protocol also caters to users all along the risk curve.

Euler v2 has been live for roughly two weeks and has $4.45M in TVL. If you're looking for competitive borrow rates, Euler v2 is worth checking out.

If you have trepidations about depositing, you can always buy Euler v2 Protocol Cover from Nexus Mutual, which protects you against hacks/exploits, oracle manipulation/failure, severe liquidation failure and governance attacks.

Here's to a successful Q4 for the Euler team.

MakerDAO

Unless you've been living under a rock, you're aware that MakerDAO is rebranding itself to Sky Money on 18 September and launching a new stablecoin (USDS). This rebrand has received a mixed reception, but I would be surprised if MakerDAO took a misstep here.

When USDS launches, Sky Money will open up the First Wave Integrator Program for applications. Rewards will be based on adoption and the amount of USDS accessed through an integrator's frontend. The details are outlined in the linked post.

USDS holders who deposit their stables in the Sky Protocol will also receive SKY Token Rewards, a share of 600M SKY per year across all participating USDS depositors. You have to choose between the Sky Savings Rate (SSR at 6.25%) or participating in the Sky Token Rewards initiative. If you're a DAI holder, you'll be able to convert your DAI to USDS, but you're not required to. Since USDS isn't censorship resistant, I imagine some users will opt to holder DAI and deposit in the DSR, where they can still earn 6% APY. It will be interesting to see if the extra 25 bps is enough of an incentive to convert DAI holders to USDS holders.

The Sky Money DAO has also decided to offboard WBTC as collateral within the Sky Protocol, a decision that's been criticized by Marc Zeller and others. The initial forum post (WBTC Changes and Risk Mitigation - 10 August 2024), authored by monetsupply of Block Analitica, highlighted the concerning development that BitGo will be transferring control of the WBTC product to BiT Global, a joint venture between BitGo, Justin Sun and the Tron ecosystem that will span multiple jurisdictions including Hong Kong and Singapore–a large departure from the long-standing US-based custody. Justin Sun's record of managing collateral-backed assets has some blackmarks (remember TUSD).

This development along with a separate failed acquisition by Galaxy Digital, who backed out of the deal for unknown reasons, has raised concerns about the health and future safety of WBTC as collateral in Sky Money's lending markets. Given this, Block Analitica Labs recommended offboarding WBTC from Sky Money, a major change since WBTC has been eligible as collateral on Sky Money (formerly MakerDAO) since its earliest days.

GFX Labs shared concern that this decision was rash and others shared the same sentiment. Sam from Phoenix Labs shared that Spark would be adjusting the LTV on WBTC in their markets to 0 to prevent new loans but leave existing positions unaffected, much like the proposed change to Sky Money. Mike Belshe, CEO of BitG0, answered what he could on the forum but requested that Sky Money appoint an attorney who could sign an NDA to conduct the necessary due diligence with BiT Global.

After much discussion, monetsupply provided an update on 12 September suggesting a timely offboarding of WBTC from Sky Money and laid out a precise schedule. Mike Belshe was not happy with the update and voiced his criticism of the decision here and here. Unless this decision is defeated by the MKR delegates, WBTC will be offboarded from both Sky Money and Spark.

Takeaways for this Week's DeFi Yields Report

ETH price is down and so are yields, but great yields are still out there. Hopefully, this issue provided you with some new protocols to explore for solid yields. We'll have to wait and see what the United States election brings along with the momentum in TradFi markets and the ETH ETFs. I don't know when ETH's price will go up, but I have faith that it will go up in the long term. Until then, I'll sit comfy earning yield in a few Uniswap v3 LPs.

Lending markets are shaking things up and bringing awesome innovations to DeFi. While Aave still leads the pack by a few miles, it's interesting to see certain functionality and trends converge in the lending space (e.g., adoption of RWA collateral, enabling isolated markets/instances, etc.). I believe there's more to come, which will ultimately benefit lenders and make onchain lending a safe resource for all–current and future onchain users.

Until next week, here is your reminder that yield is everywhere around us. You just need to reach out and grab it without losing your balance and dropping your bag. I promise I'll be back next week with an overview of the market, yields, and the latest updates.

Stay safe out there, friends.