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 smart contract as a lower credit risk than the US Treasury.
However, this mispricing ended within 48 hours. The market's repricing of DeFi credit risk was triggered by an exploit on Kelp DAO's cross-chain bridge, which allowed an attacker to mint unbacked tokens and borrow against them on Aave.
This led to a contagion effect, with $6-10 billion in net outflows from Aave and a surge in stablecoin deposit APYs. The incident highlighted the lack of bankruptcy laws and recourse in DeFi protocols, making it challenging for allocators to estimate their exposure to risk.
The market's adjustment of DeFi rates serves as a reminder that permissionless markets carry a premium over their regulated equivalents and are not risk-free.