The Harsh Reality of DeFi: The Collapse of Stablecoin Yields, Welcome to the Era of Risk

Author: Justin Alick

Compiled by: Deep Tide TechFlow

Has the era of easily obtaining cryptocurrency gains officially come to an end? A year ago, depositing cash into stablecoins felt like finding a cheat code. Generous interest rates, ( said to be ) zero risk. Today, this beautiful dream has turned to ashes.

The yield opportunities for stablecoins in the entire cryptocurrency sector have collapsed, leaving DeFi lenders and yield farmers stranded in a wasteland of almost zero returns. What exactly happened to that “risk-free” annual yield (APY) golden goose (money tree)? And who is to blame for the yield mining turning into a ghost town? Let's delve into the “autopsy report” of stablecoin yields, which is not a pretty sight.

The dream of “risk-free” returns is dead.

Do you remember those wonderful old times? ( Around 2021 ), various protocols were throwing out double-digit annual yields of USDC and DAI like candy? Centralized platforms expanded their assets under management ( AUM ) to huge levels in less than a year by promising stablecoin yields of 8-18%. Even so-called “conservative” DeFi protocols offered over 10% yield on stablecoin deposits. It was as if we had cracked the financial system, free money! Retail investors flocked in, convinced they had found a magical, risk-free 20% return on stablecoins. We all know how that ended.

Fast forward to 2025: this dream is on its last legs. Stablecoin yields have plummeted to single digits or zero, completely destroyed by a perfect storm. The promise of “risk-free returns” is dead, and it was never real to begin with. The golden goose of DeFi turned out to be just a headless chicken.

Token plummets, and profits collapse accordingly.

The first culprit is obvious: the cryptocurrency bear market. The decline in token prices has destroyed many sources of yield. The bullish market for DeFi was supported by expensive tokens; the 8% yield you could earn on stablecoins before was because the protocol could mint and distribute governance tokens whose value soared. But when these token prices plummeted by 80-90%, the party was over. Liquidity mining rewards have dried up or become nearly worthless. For example, Curve's CRV token was close to $6 and is now hovering below $0.50—plans to subsidize liquidity provider yields have completely fallen apart. In short, without a bull market, there are no free lunches.

Accompanying the price drop is a massive outflow of liquidity. The total locked value in DeFi ( TVL ) has evaporated from its peak. After reaching a high at the end of 2021, TVL entered a downward spiral, plummeting over 70% during the crash of 2022-2023. Billions of dollars in capital fled the protocols, either due to investors cutting their losses or forced withdrawals from chain failures. With half of the capital disappearing, yields naturally wither: borrowers decrease, transaction fees drop, and allocatable token incentives significantly diminish. The result is that DeFi's TVL ( resembles more of a “total value loss” ) that has struggled to recover to even a small fraction of its former glory, despite a modest rebound in 2024. When the fields have turned to dust, yield farms harvest nothing.

Risk appetite? Completely averse.

Perhaps the most important factor stifling returns is simple fear. The risk appetite of the cryptocurrency community has dropped to zero. After experiencing the horror stories of centralized finance (CeFi) and the exit scams in DeFi, even the most aggressive speculators are saying “no, thanks.” Whether retail investors or whales, they have basically sworn off the once-popular chase for yields. Since the disaster of 2022, most institutional funds have paused cryptocurrency investments, and those burned retail investors are now much more cautious. This shift in mindset is evident: when a suspicious lending application could disappear overnight, why chase a 7% return? The saying “if it looks too good to be true, it probably isn't” has finally taken root.

Even within DeFi, users are avoiding everything except the safest options. Leveraged yield farming was once the craze of DeFi summer, but now it has become a niche market. Yield aggregators and vaults are similarly quiet; Yearn Finance is no longer a hot topic on crypto Twitter (CT). Simply put, no one has the appetite to try those peculiar strategies now. The collective risk aversion is stifling the once generous returns that compensated for these risks. No risk appetite = no risk premium. What remains is only a meager base interest rate.

Don't forget about the agreements: DeFi platforms themselves have also become more risk-averse. Many platforms have tightened collateral requirements, limited borrowing limits, or shut down unprofitable funds. After seeing competitors face collapses, agreements are no longer pursuing growth at all costs. This means fewer aggressive incentives and more conservative interest rate models, further compressing yields.

The Revenge of Traditional Finance: Why Settle for 3% in DeFi When Government Bond Yields Are 5%?

There is an ironic twist: the traditional financial world is starting to offer better returns than cryptocurrencies. The Federal Reserve's interest rate hikes have pushed the risk-free rate ( and Treasury yields ) close to 5% for 2023-2024. Suddenly, grandma's boring Treasury yield exceeds many DeFi liquidity pools! This completely flips the script. The entire appeal of stablecoin lending was that banks pay 0.1% while DeFi pays 8%. But when Treasuries pay 5% with zero risk, DeFi's single-digit returns look extremely unappealing on a risk-adjusted basis. When Uncle Sam offers higher yields, why would a rational investor put dollars into a dubious smart contract to earn 4%?

In fact, this yield gap has siphoned capital away from the cryptocurrency space. Big players have started putting cash into safe bonds or money market funds instead of stablecoin farms. Even stablecoin issuers cannot ignore this; they have started investing reserves into government bonds to earn hefty returns, most of which are kept by themselves. As a result, we see stablecoins sitting idle in wallets, not being deployed for use. The opportunity cost of holding stablecoins with 0% yield has become enormous, leading to hundreds of billions in lost interest. Dollars parked in “pure cash” stablecoins have done nothing, while real-world interest rates are soaring. In short, traditional finance has taken away DeFi's meal ticket. DeFi yields must rise to compete, but without new demand, they cannot rise. So the funds have left.

Currently, Aave or Compound may offer an annual yield of about 4% for your USDC ( accompanied by various risks ), but the yield on a 1-year U.S. Treasury bond is roughly the same or higher. The math is harsh: on a risk-adjusted basis, DeFi no longer has the capability to compete with traditional finance. Smart money knows this, and capital will not rush back until the situation changes.

Token emission of the agreement: unsustainable and coming to an end

Let's be honest: many of the hefty returns were not real from the start. They were paid through token inflation, venture capital subsidies, or outright Ponzi economics. This game can only last so long. By 2022, many protocols had to face reality: you cannot sustain a 20% annual yield without blowing up in a bear market. We witnessed one protocol after another cutting rewards or shutting down projects because they were simply unsustainable. Liquidity mining activities were scaled back; as the treasury ran dry, token incentives were reduced. Some yield farms literally exhausted the token emissions used for payments — the wells ran dry, and yield chasers moved on.

The boom of yield mining has turned into a bust. The protocols that once continuously printed tokens are now facing the consequences, with the token price plummeting to the bottom, and the employed capital has long since departed.

In fact, the ride of profits has gone off the rails. Crypto projects can no longer mint magic money to attract users unless they want to destroy their token value or incur the wrath of regulators. With new retail investors willing to mine and sell these tokens, ( cough cough, the number of investors ) is decreasing, and the feedback loop of unsustainable profits has collapsed. The only remaining profits are those truly supported by actual income ( from transaction fees and spreads ), and these profits are much smaller. DeFi is forced to mature, but in the process, its yields have shrunk to realistic levels.

Yield Mining: A Ghost Town

All these factors have converged, turning yield farming into a ghost town. Yesterday's vibrant farms and “aggressive” strategies feel like ancient history. Today, when browsing crypto Twitter, do you see anyone bragging about 1000% annualized returns or new farm tokens? Hardly. Instead, you see weary veterans and liquidity refugees. The few remaining yield opportunities are either tiny and high-risk, thus overlooked by mainstream capital, or low enough to be numbing. Retail investors are either leaving their stablecoins idle, yielding zero but preferring safety, or cashing out into fiat and putting funds into off-chain money market funds. Giant whales are striking deals with traditional financial institutions to earn interest or simply holding dollars, uninterested in playing the yield game of DeFi. The result: farms are desolate. This is the winter of DeFi, and crops cannot grow.

Even in places with returns, the atmosphere has completely changed. DeFi protocols are now promoting integration with real-world assets (RWA) to barely achieve returns of 5% here and 6% there. Essentially, they are building a bridge to traditional finance themselves—acknowledging that relying solely on on-chain activities can no longer generate competitive returns. The dream of a self-sustaining crypto yield universe is fading. DeFi is realizing that if you want “risk-free” returns, you will ultimately do what traditional finance does ( buy government bonds or other physical assets ). Guess what—these yields hover at best in the mid-single digits. DeFi has lost its edge.

So our current situation is: the stablecoin yields we knew are dead. A 20% annual yield is a fantasy, and even 8% is long gone. We are faced with a sobering reality: if you want to achieve high returns in cryptocurrency now, you either take on insane risks ( with the corresponding possibility of total loss ), or you are chasing something illusory. The average DeFi stablecoin lending rates can hardly exceed bank fixed deposit rates, if they can exceed them at all. On a risk-adjusted basis, DeFi yields are now simply ridiculous compared to other options.

There are no free lunches in cryptocurrency anymore.

In true doomsday prophecy style, let's be blunt: the era of easily obtaining stablecoin yields is over. The dream of risk-free returns in DeFi is not just dead; it has been murdered by market gravity, investor fear, traditional financial competition, disappearing liquidity, unsustainable token economics, regulatory crackdowns, and stark reality. Cryptocurrency has gone through its wild west yield feast, ultimately ending in tears. Now, survivors sift through the ruins, content with a 4% yield and calling it a victory.

Is this the endgame for DeFi? Not necessarily. Innovation always sparks new opportunities. But the tone has fundamentally changed. Earnings in cryptocurrency must be earned through real value and real risk, not through magical internet money. The days of “stablecoins yielding 9% because the digits go up” are over. DeFi is no longer a smarter choice than your bank account; in fact, in many ways, it's worse.

Provocative question: Will yield farming make a comeback, or is it just a temporary gimmick of the zero interest rate era? The outlook seems bleak at the moment. Perhaps if global interest rates decline again, DeFi can shine once more by offering yields a few percentage points higher, but even then, trust has been severely damaged. It's hard to put the genie of doubt back in the bottle.

Currently, the crypto community must face a harsh reality: there is no risk-free 10% return waiting for you in DeFi. If you want to earn high returns, you must risk capital in volatile investments or complex schemes, which is exactly what stablecoins were supposed to help you avoid. The whole point of stablecoin yields was to provide a return-generating safe haven. This illusion has been shattered. The market has awakened to realize that “stablecoin savings” is often a euphemism for playing with fire.

In the end, perhaps this liquidation is healthy. Eliminating false profits and unsustainable promises may pave the way for more authentic, reasonably priced opportunities. But this is a long-term hope. The reality today is harsh: stablecoins still promise stability, but they no longer promise yields. The crypto yield farming market is declining, and many former farmers have hung up their work clothes. DeFi was once a paradise for double-digit yields, but now it is even difficult to provide treasury-level returns, and the risks are much higher. The crowd has noticed this, and they are voting with their feet ( and funds ).

Conclusion

As a critical observer, it is hard not to maintain a radical stance intellectually: what use is a revolutionary financial movement if it can't even outperform your grandmother's bond portfolio? DeFi needs to answer this question, and until it does, the winter of stablecoin yields will continue to grind on. The hype has disappeared, the yields have vanished, and perhaps the tourists have also disappeared. What remains is an industry forced to confront its own limitations.

Meanwhile, let us mourn the narrative of “risk-free returns.” It used to be quite interesting. Now back to reality, stablecoin yields are actually zero, and the crypto world will have to adapt to life after the party is over. Be prepared accordingly and do not be deceived by any new promises of easy gains. There is no such thing as a free lunch in this market. The sooner we accept this, the sooner we can rebuild trust, and perhaps one day, find real earnings instead of handouts.