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 considered an unregulated, open-source smart contract a lower credit risk than the US Treasury. However, this mispricing was corrected within 48 hours. The hierarchy of dollar-credit options by yield no longer made sense, with Treasury overnight at 3.64%, Ledn's investment-grade Bitcoin-backed ABS senior tranche at 6.84%, and Aave at 2.32%.
The market repriced DeFi credit risk after an attacker exploited Kelp DAO's cross-chain bridge, minting unbacked rsETH tokens and borrowing an estimated $190-230 million of real assets against non-existent collateral. This led to instant contagion, with $6-10 billion in net outflows from Aave and utilization on WETH, USDT, and USDC pools hitting 100%. Aave stablecoin deposit APYs rose from 3-6% to 13.4% within two days, and Morpho's USDC vault jumped from 4.4% APR to 10.81%.
The incident highlighted the lack of bankruptcy law and recourse in DeFi protocols, making it essential for allocators to understand the risks. DeFi is not going away, but the architecture carries real risks, and the 48-hour market correction served as a reminder that permissionless markets are not risk-free and carry a premium over regulated equivalents.