Until April 17, lending stablecoins on Aave yielded 2.32% APY, lower than the Federal Reserve's overnight rate of 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, with Aave's stablecoin deposit APY soaring to 13.4% after an attacker exploited Kelp DAO's cross-chain bridge, minting unbacked tokens and borrowing against non-existent collateral. The incident highlighted the lack of bankruptcy law and recourse in DeFi, making it challenging to estimate exposure to risk.
The aftermath saw significant outflows from Aave, with $6-10 billion leaving the platform, and a ripple effect on other DeFi protocols. The incident serves as a reminder that DeFi is not risk-free and carries a premium over regulated equivalents. Institutional allocators should take this signal seriously when sizing DeFi exposure for the coming year.