DeFi's Credit Risk Repriced in Just 48 Hours

Until April 17, lending stablecoins on Aave yielded 2.32% APY, despite the Federal Reserve's overnight rate being 3.64%. This implied that the market viewed an unregulated, open-source smart contract as a lower credit risk than the US Treasury. However, this mispricing ended within 48 hours. The market repriced DeFi credit risk after an attacker exploited Kelp DAO's cross-chain bridge, minting unbacked tokens and borrowing against them on Aave. This led to a contagion, with $6-10 billion in net outflows from Aave, and utilization on certain pools reaching 100%. As a result, Aave's stablecoin deposit APYs surged from 3-6% to 13.4%, and Morpho's USDC vault APR jumped from 4.4% to 10.81%. The incident highlights the lack of bankruptcy law and recourse in DeFi protocols, making it essential for institutional allocators to reassess their exposure to DeFi. The market's repricing of DeFi credit risk serves as a reminder that permissionless markets carry a premium over their regulated equivalents and are not risk-free.