Written after the hacker attack: Does the DeFi world really have risk-free returns?

What are the sources of risk for the seven major high-yield strategies?

Written by: stablewatch

Compiled by: Azuma (@azuma_eth)

Editor's note: The DeFi market has not been calm recently. First, the popular project USDf briefly lost its peg due to doubts about reserve assets and sources of income. Then, the established contract exchange GMX suffered over $40 million in losses due to a hacker attack (see "Over $40 Million Stolen: The Whole Story Behind GMX's Precise Ambush"). For a moment, the market was in a state of alarm, and in the face of seemingly decent yields, the security of the principal seems to be even more important.

After the incident last night, stablewatch published an article titled "Is There Really No-Risk Yield in the DeFi World?" For all users intending to continue participating in DeFi, it is necessary to review the underlying risk conditions of the market we are in.

The following is the original content of stablewatch, translated by Odaily Planet Daily.

Risk-Free Rate in DeFi

In traditional finance (TradFi), the "risk-free rate" is the most commonly used benchmark for investment returns, representing the yield that can be achieved without risking the principal. For example, U.S. Treasury bills (T-bills) — they are backed by the credit of the U.S. government, which can print money at will to repay its debts (this is also the sacred logic behind Bitcoin's initial bullishness), but in the wild world of DeFi, the concept of "risk-free" becomes blurred. Can we find something similar to the risk-free rate in DeFi? Let us delve into this chaotic world.

Risk-Free Rate: The Cornerstone of Traditional Finance

Let's quickly review. In traditional finance, the risk-free rate represents a baseline return for ultra-safe investments. For example, government bonds, why are they "risk-free"? Because the U.S. government backs them with its credit, meaning it can print money to pay off debts even in the face of soaring inflation. This rate is the foundation of almost all financial models: stock valuations, bond pricing, the DCF analyses that analysts stay up late to do... all rely on it. You might think that interest rates in traditional finance should be stable and predictable, but that's not the case—there's a field called "monetary policy" that specifically regulates these rates, but that's a topic worth writing a long article about.

Now, let's see if there are similar concepts in DeFi.

Why is there no true risk-free interest rate in DeFi?

In DeFi, the risk-free rate is more of a myth than a reality. A seasoned peer once joked, "In DeFi, we're all testing extremely high-risk new financial software with real money." This is absolutely true. Early participants sometimes reap substantial rewards for taking risks, while at other times they suffer heavy losses. The allure and curse of the decentralized ecosystem lie in the fact that it lacks traditional safety nets — no central bank guarantees, no regulatory protections, and no FDIC insurance for your assets. We designed it with the intention of trading safety for the freedom of experimentation and innovation, but newcomers must understand that they are facing a complex jungle of risks. Risks also include:

• Rug pulls: Projects that promise outrageous returns disappear overnight with the funds;
• Hacker Attacks: Vulnerabilities in smart contracts can cause those so-called most secure platforms to lose millions of dollars in an instant;
• Cyber Threats: North Korean hackers are eyeing DeFi protocols and users like a free all-you-can-eat lobster buffet;

In addition, there is the creed of "code is law," which is a beautiful concept — transactions are irreversible and cannot be undone. We have seen attackers abscond with millions of dollars while claiming to "adhere to the rules of the agreement," making traditional legal recourse extremely difficult. Nevertheless, bounty hunters and law enforcement have successfully tracked down some perpetrators, but only in a few cases. In the DeFi market, the boundary between innovation and chaos remains fragile.

However, for those who wish to stay as relaxed as possible while looking for basic "safe returns", what other options are there?

"Pseudo Risk-Free" Yield Options in DeFi

DeFi will not easily give up. Although the perfect risk-free interest rate is out of reach, there are still a few close candidates.

• AAVE: This blue-chip lending platform offers relatively reliable single-digit returns through the supply and demand of funds, having withstood years of scrutiny, and is often regarded as a "safe haven" in DeFi.
• Curve Finance: A stablecoin trading empire built by math enthusiasts, generating profits through trading fees (essentially making the funds "work") and supplemented by CRV token incentives. As one of the few nearly fully decentralized and well-functioning examples, its token has maintained its value over the past four years and continues to do so. Of course, participating in DAO governance is not for the faint-hearted.
• Tokenized US Treasuries: Platforms like Ondo and M are bringing US Treasury bonds on-chain, offering 3-4% yields similar to government bonds (2025 data), combining the safety of traditional finance with DeFi innovation — although the risks of smart contracts still exist.

The differences among these options are significant: the supply and demand mechanism of AAVE, the yield model of Curve that relies on trading volume, and the "safety" of tokenized US Treasuries cannot fully avoid blockchain failures and the potential risks that have been mockingly referred to as a "hotbed of crime" by DeFi OGs. While they are not truly risk-free, they are currently the best choices.

Who is pouring into on-chain savings?

This type of "pseudo risk-free" return has attracted several unique users.

• Non-US investors: Pursuing "American-style returns" while unwilling to be constrained by traditional banks. The previous generation of offshore investors achieved cross-border asset allocation by purchasing properties in London, Vancouver, or New York, and now they are shifting their funds towards DeFi protocols.
• Crypto Whales: Due to security concerns, tax risks, and other real-world obstacles associated with large cash-outs, many have found that on-chain yield farming not only significantly outperforms traditional savings accounts but also maintains exposure to crypto assets.
• Unbanked individuals: With the proliferation of mobile wallets, users in countries with unstable local currencies are transferring their savings on-chain at lower costs—opening a dollar account still faces high fees and bureaucratic barriers in many developing countries.

This trend is breaking through niche circles. On-chain savings, with their accessibility, yield advantages, and ability to address the limitations of traditional finance, are attracting all those seeking alternatives to the banking system. As infrastructure like mobile wallets continues to evolve, this shift could reshape the financial landscape - the launch of stablecoin programs by institutions such as JPMorgan is a direct response to market demand.

Yield Stablecoins: The Game of Risk and Return

Yield-Bearing Stablecoins (YBS) represent a significant evolution in the digital currency space, combining the stability of dollar-pegged assets with an endogenous yield mechanism. In 2025, some YBS products offer an annual yield of 6-12%, far exceeding traditional government bond returns. However, these enticing returns require careful evaluation.

High returns are inevitably accompanied by additional conditions. Most of the returns come from active management, risk-taking behavior, or acting as a counterparty in others' trades. Can it generate substantial returns? Indeed. But is it risk-free? Far from it.

This raises a fundamental categorization question: are these tools essentially stablecoins or crypto-themed investment funds? When the yields significantly exceed risk-free benchmarks such as government bonds, investors have clearly departed from the risk-free domain. Its value proposition is essentially still the classic risk-return trade-off: higher yield potential inevitably corresponds to higher risk exposure.

Analysis of Yield Enhancement Strategies

DeFi protocols often adopt various yield enhancement strategies, each with its own unique risk characteristics and operational logic.

Real World Asset-backed (RWA-backed): Using tokenized real assets (ranging from government bonds to auto loans, consumer credit, and other complex assets) as underlying collateral. Some protocols maintain conservative strategies, while others venture into high-risk credit markets, exchanging higher default risks for excess returns.

Crypto-backed: Generate stablecoins through collateralized debt positions (CDP) on platforms like Liquity and Abracadabra. Performs well under normal market conditions, but may lead to bad debt accumulation and protocol turmoil when collateral rapidly depreciates.

Stablecoin Wrapper (YBS wrappers): Deploying the underlying stablecoin to lending platforms such as AAVE and Euler to obtain benchmark returns, and then wrapping the positions into certificate tokens. These tokens can be re-collateralized and layered with token incentives, creating a multi-layered yield structure. While it can compound value, the nested relationships between protocols can amplify systemic risks.

Delta Neutral / Synthetic Positioning: Achieve funding rate differentials through cross-platform long-short hedging. Profitability relies on low-cost position building and interest rate differentials, but execution losses and extreme market volatility may render neutral strategies ineffective.

Algorithmic Strategy: Automated systems capture market opportunities in real-time and adjust positions, which provides operational efficiency but faces risks of infrastructure failure and algorithm malfunction.

Active Management Fund Type: Strategically allocated by fund managers within the DeFi framework, essentially a blockchain replication of the traditional asset management model. This model raises questions about the necessity of smart contract automation and may also attract regulatory scrutiny from jurisdictions with strict definitions of "decentralization."

Tranched products: these are risk-tranching instruments that provide differentiated risk-return combinations for different investors. Investors in the so-called "safe" tranche may inadvertently become tail risk insurers, with their funds effectively serving as a buffer against extreme losses in the underlying assets.

Evolving Paradigm of Returns

The above strategy represents the mainstream approach for enhancing stablecoin yields in current DeFi protocols. The programmable nature of decentralized finance will continue to foster innovation in yield mechanisms, signaling that more complex hybrid strategies and new methodologies will emerge in the future. This dynamic evolution not only broadens the boundaries of financial engineering but also requires investors to establish more sophisticated risk assessment frameworks — in the labyrinth of on-chain yields, the highlighted APR figures may only serve as the starting point of a risk coordinate system rather than its endpoint.

Core Conclusion: The High-Risk Nature of DeFi

The key insights we have drawn are as follows:

• There is no true risk-free interest rate in DeFi;
• Tokenizing US Treasury bonds is closest to risk-free, but by no means invulnerable;
• The on-chain lending interest rate has achieved an independent price discovery mechanism;
• Yield stablecoins exchange stability for returns, essentially resembling on-chain market neutral hedge funds rather than savings accounts;
• The risk of yield strategies varies – higher returns come with greater risks.

Does the high-risk nature of DeFi constitute a fatal flaw? Not necessarily, after all, the crypto community has always been striving to carve out its own territory outside of the traditional financial system. High yields do exist, but they always come at a cost. Therefore, before putting your savings into any income-generating product, please remember - carefully verify on-chain data; taking on risk is always the first principle of DeFi.