Karin Novilda
The decentralized finance (DeFi) ecosystem generated an estimated $8 billion in on-chain yield in 2025, driven predominantly by borrowing demand, trading fees within automated market makers (AMMs), and perpetuals funding rates. This comprehensive figure, derived from a detailed analysis by researcher Vadym, offers an unprecedented look into the true origins of DeFi returns, revealing a landscape characterized by both abundance and significant disparities. A particularly striking finding is that over half of stablecoin deposits within the Ethereum ecosystem are currently yielding less than benchmark U.S. Treasury rates, signaling a significant compression in what was once considered "safe" DeFi yield.
This in-depth examination arrives amidst a broader drying up of yields across the DeFi sector. Borrowing rates on major lending platforms have increasingly converged with the Federal Reserve’s policy rate, reflecting a maturing market and reduced speculative fervor. Concurrently, average rates for stablecoin deposits, often seen as a bellwether for low-risk DeFi returns, have settled around 3%, a figure notably below current U.S. Treasury yields and the Secured Overnight Financing Rate (SOFR). For instance, Aave, one of DeFi’s largest money markets, reported 30-day average yields on USDC and USDT hovering around a mere 2%. Across more than $20 billion in stablecoin vaults on Ethereum and its Layer 2 networks, a substantial 58% of the total value locked (TVL) is earning below 3% APY, challenging the long-held narrative of superior DeFi returns for passive stablecoin holders.
The Evolution of DeFi Yield: From "Summer" to Compression
To fully appreciate the current state of DeFi yields, it’s crucial to understand its historical trajectory. The period colloquially known as "DeFi Summer" in 2020 saw an explosion of innovation and liquidity, with protocols offering eye-popping annual percentage yields (APYs) often reaching triple digits. These early yields were largely fueled by nascent tokenomics, liquidity mining incentives designed to bootstrap new platforms, and a largely unregulated, high-growth environment. Speculative demand, coupled with novel financial primitives, created an ecosystem where capital could be deployed for substantial returns.
However, as the market matured, regulatory scrutiny increased, and global macroeconomic conditions shifted, the era of exuberant, unsustainably high yields began to recede. The Federal Reserve’s aggressive interest rate hikes in 2022-2023 to combat inflation fundamentally altered the risk-free rate landscape, providing a compelling alternative for capital previously seeking refuge and yield solely within DeFi. This shift forced DeFi protocols to recalibrate their yield generation mechanisms and investors to re-evaluate their risk-adjusted returns. The current yield compression is, in many ways, a sign of DeFi’s integration into the broader financial world, where it must now compete more directly with traditional financial instruments.
Dissecting the $8 Billion: Primary Sources of On-Chain Yield
Vadym’s analysis meticulously breaks down the $8 billion in 2025 yield into five primary categories, each presenting distinct risk profiles and scalability challenges:
-
AMM Trading Fees ($4.2 Billion): The Engine of Decentralized Exchange
Automated Market Maker (AMM) trading fees emerged as the largest single contributor, accounting for approximately $4.2 billion. Protocols like Uniswap, Meteora, and Raydium collectively captured 62% of this segment, underscoring their dominance in decentralized exchange. AMMs facilitate permissionless trading by allowing users to pool assets, earning a small fee from each trade executed against their liquidity.
However, the report highlights a critical caveat: these fees are notoriously difficult for individual liquidity providers (LPs) to capture effectively, particularly in structured products. LPs, especially those utilizing concentrated liquidity features (which allow LPs to allocate capital within specific price ranges), frequently suffer losses due to "toxic order flow." This phenomenon, often referred to as impermanent loss or divergent loss, occurs when arbitrageurs profit by trading against LPs during periods of significant price movement, leaving LPs with a less valuable portfolio than if they had simply held their assets. Despite the development of sophisticated LP-manager vaults designed to mitigate these risks, they have yet to achieve widespread adoption or demonstrate consistent profitability, indicating a significant hurdle for retail investors seeking stable returns from this yield source. -
Borrow Interest ($1.76 Billion): The Economic Backbone of Lending
Money markets, including established platforms like Aave, Morpho, Spark, Maple, and Fluid, generated approximately $1.76 billion through borrow interest. These platforms are central to DeFi’s infrastructure, constituting over 60% of total DeFi TVL, and thus represent the sector’s economic backbone. They enable users to lend out their crypto assets to earn interest, while others can borrow by collateralizing their own assets.
A crucial insight from the analysis, however, is the prevalence of "recursive borrowing." Roughly half of all borrowing demand is not for external capital but rather for looping strategies, where users borrow assets only to redeploy them into other yield-generating opportunities. For example, on Aave’s Ethereum deployment, approximately 39% of borrowing demand is directed towards leveraging Ethereum staking rewards, a strategy where users borrow ETH to stake more ETH, amplifying their staking yield but also their liquidation risk. Another 11.6% is used to loop Ethena’s sUSDe, a synthetic dollar that itself generates yield from staking and funding rates. This recursive behavior, while driving lending volume, also indicates a degree of circularity in DeFi yield generation, raising questions about the true "organic" demand for capital within the ecosystem. -
Perpetuals Funding Fees ($300 Million): The Emergence of Delta-Neutral Strategies
Perpetuals funding fees contributed around $300 million, a segment largely pioneered on-chain by protocols like Ethena. Perpetual contracts are a type of derivative that allows traders to speculate on the future price of an asset without an expiration date. To keep the perpetual contract price pegged to the underlying asset’s spot price, a funding rate mechanism is employed: traders holding positions that deviate from the spot price pay or receive a fee, typically every eight hours.
Ethena’s sUSDe, a synthetic dollar, leverages this mechanism by combining staking rewards with short perpetual funding rates to generate its yield. This innovative approach, launched in 2024, has drawn both significant praise for its novel yield generation and considerable alarm due to its reliance on potentially volatile funding rates and the inherent risks of maintaining a delta-neutral hedge in a volatile market. The growth of this category highlights a nascent but significant area for yield generation, particularly for sophisticated strategies that can manage complex hedging operations. -
Real-World Assets (RWAs) ($600–900 Million): Bridging TradFi and DeFi
Real-world assets (RWAs) generated an estimated $600 million to $900 million in yield, marking a growing trend of integrating traditional finance assets into the blockchain ecosystem. U.S. Treasuries dominated this market segment, accounting for approximately 41% of RWA exposure, followed by private credit at 25%. This category represents a crucial bridge between the on-chain and off-chain worlds, allowing DeFi protocols to access stable, regulated yields typically found in traditional markets. The appeal of RWAs lies in their ability to offer more predictable and often lower-risk yields compared to purely crypto-native strategies, especially in a period where on-chain yields are compressed. This integration is increasingly seen as a pathway for DeFi to attract institutional capital and provide a more robust, diversified yield offering. -
Network Staking Rewards and MEV (Remainder): Foundational Layer Yield
The remainder of the $8 billion yield is comprised of network staking rewards and Miner Extractable Value (MEV). Ethereum’s issuance, for example, totaled roughly one million ETH in 2025, representing a foundational yield source for the network’s validators. Staking rewards are paid to participants who lock up their cryptocurrency to support the network’s security and operations. MEV, on the other hand, refers to the profit that can be extracted by strategically ordering, inserting, or censoring transactions within a block.
The report notes a downward trend in the MEV-derived portion of staking yield. This is largely attributed to the increasing adoption of private order flow routing, which now handles about 90% of swaps. Private order flow effectively bypasses the public mempool, reducing the opportunities for frontrunning and other MEV extraction techniques that previously contributed significantly to validator profits. This shift indicates a maturing market for transaction processing, potentially leading to a more equitable distribution of value but also reducing a lucrative, albeit controversial, yield source for stakers.
Untapped Potential: Underdeveloped Yield Sources
Beyond the primary categories, the analysis identifies several underdeveloped areas within DeFi with significant untapped potential for yield generation:
- Insurance Underwriting: In 2025, insurance underwriting generated a paltry $5.5 million in premiums, primarily through Nexus Mutual. Despite the inherent risks in DeFi, the insurance market remains nascent, suggesting a huge gap between the demand for risk coverage and the supply of robust, scalable on-chain insurance products.
- Options Markets: While centralized finance (CeFi) options markets boast open interest of $30–50 billion, on-chain options currently have only about $1.8 billion in open interest, with no breakout structured products. This disparity points to a lack of sophisticated on-chain infrastructure, liquidity, and user-friendly interfaces needed to compete with traditional options exchanges.
- Volatility Selling and Protocol Risk Transfer: These areas remain largely unexplored. As the DeFi ecosystem grows in complexity and interconnectedness, the ability to effectively price, transfer, and monetize various forms of protocol risk (e.g., smart contract risk, oracle risk, liquidity risk) presents a substantial opportunity. The analysis flags this as a potential growth area as risk curation becomes increasingly competitive and sophisticated within DeFi.
Sky’s Balancing Act: A Case Study in Hybrid Yield Generation
The report highlights Sky (formerly MakerDAO) as a compelling case study in how protocols are strategically assembling disparate yield sources to offer competitive returns. Amidst the broader yield compression, Sky’s 3.75% USDS Savings Rate has attracted significant capital, demonstrating its ability to maintain attractive yields. This success is reflected in Sky’s TVL, which surged 38% in March, positioning it as the fourth-largest DeFi protocol, with the sUSDS savings pool alone accounting for approximately $6.5 billion in deposits.
Sky’s income generation reveals a sophisticated hybrid model:
- Off-Chain Origination (70%): The bulk of Sky’s income (approximately 70%) is derived from off-chain sources. This primarily includes USDC earning Coinbase rewards through its peg stability module (PSM), and significant exposure to Real-World Assets (RWAs) through products like BlackRock’s BUIDL fund and Janus Henderson funds. This strategy underscores a pragmatic approach to leveraging the stability and yield potential of traditional finance instruments.
- On-Chain Sources (30%): The remaining 30% flows from on-chain activities. Spark, acting as Sky’s primary allocation arm, intelligently routes capital into various yield-bearing opportunities, including Sparklend, Maple’s institutional lending, Anchorage, and other protocols, dynamically adjusting allocations based on prevailing market rates.
Sky’s model offers a powerful implication: even as traditional finance yield increasingly flows through permissioned channels, its redistribution and transformation are happening on-chain. This hybrid approach provides a crucial "floor" for DeFi rates, suggesting a future where DeFi protocols can offer competitive yields by blending the best of both worlds.
Implications for the Future of DeFi
The findings of Vadym’s analysis carry significant implications for investors, protocol developers, and the broader financial landscape:
- Maturing Market and Investor Expectations: The compression of "safe" stablecoin yields below U.S. Treasuries signals a maturation of the DeFi market. Investors can no longer expect outsized, low-risk returns as a given. This will likely lead to a more discerning investor base, focusing on truly risk-adjusted returns and a deeper understanding of yield origination.
- Innovation in Yield Generation: The challenges highlighted in AMM fees and the emergence of perpetuals funding rates point to a need for more sophisticated yield generation and capture mechanisms. This could spur innovation in areas like active liquidity management, structured products that can effectively manage impermanent loss, and novel delta-neutral strategies.
- The TradFi-DeFi Convergence: Sky’s success story underscores the increasing intertwining of traditional finance and decentralized finance. The seamless flow of capital between these two realms, particularly through RWAs, suggests a future where the lines between them blur, leading to hybrid financial products and services.
- Demand for Derivatives and Risk Management: The underdevelopment of on-chain insurance and options markets, coupled with the growing complexity of yield sources, highlights a critical demand for sophisticated derivatives and risk transfer mechanisms. This could pave the way for a new generation of DeFi products, including fixed-rate products, interest-rate swaps, and structured tranches, allowing for more precise risk and return profiles.
- Regulatory Scrutiny: As DeFi protocols increasingly engage with RWAs and blend with traditional finance, regulatory bodies will likely increase their scrutiny. The classification of various DeFi products and their compliance with existing financial regulations will become paramount, influencing the design and scalability of future yield-generating opportunities.
- Efficiency and Transparency: The analysis reinforces DeFi’s inherent transparency. The ability to map yield sources on-chain, even if complex, offers a level of insight rarely available in traditional finance. This transparency, coupled with growing market efficiency, will continue to drive innovation and competition.
In conclusion, the $8 billion in on-chain yield generated in 2025 paints a picture of a DeFi ecosystem undergoing a significant transformation. While the days of effortlessly high stablecoin yields may be behind us, the underlying mechanisms of borrowing, trading, and innovative hedging continue to create substantial value. The path forward for DeFi yield will likely involve greater sophistication, a strategic blend of on-chain and off-chain assets, and a renewed focus on robust risk management, ultimately paving the way for a more integrated and resilient financial future.
