Prior to 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 was corrected within 48 hours. The market's repricing of DeFi credit risk was triggered by an attacker exploiting Kelp DAO's cross-chain bridge, minting unbacked tokens worth around $292 million.
This led to a contagion effect, with $6-10 billion in net outflows from Aave and a significant increase in stablecoin deposit APYs. The incident highlights the lack of bankruptcy law and recourse within DeFi protocols, making it essential for institutional allocators to reassess their exposure to DeFi. The market's adjustment serves as a reminder that permissionless markets, including DeFi, carry inherent risks and premiums over their regulated counterparts.