DeFi rates have been found to be linked to US bond yields

Interest rates in decentralised finance are not determined in complete isolation from the traditional market. An analysis of data from the Aave platform, published in Finance Research Letters, revealed a consistent correlation between stablecoin interest rates and US Treasury yields.

A 0.25 percentage point shift in the yield on 10-year US Treasury bonds was associated with a change of approximately one percentage point in the interest rate on stablecoin loans. This is a statistical correlation, not proof of direct causality.

Details

The author of the study, Siddharth Bhambhwani, a lecturer in accounting at Pennsylvania State University (Siddharth Bhambhwani), compared lending and deposit rates on Aave with yields on US Treasury bonds. The sample covered the period from January 2023 to March 2026.

Aave is a decentralised finance (DeFi) platform. Users deposit digital assets into shared pools and earn interest, whilst borrowers take assets from these pools and pay for their use. Transactions are executed by programmes on the blockchain – smart contracts – and the interest rate adjusts automatically depending on what proportion of the pool’s funds has already been lent out.

Typically, such a loan requires over-collateralisation. To borrow assets worth $80, a user may need to lock up another cryptocurrency worth $100. If the price of the collateral falls too close to the sum of the debt and the accrued interest, the protocol may automatically sell the collateral.

Although Aave’s formula does not contain a direct link to government bonds, rates on dollar-pegged stablecoins and Treasury yields have consistently moved in tandem. The most consistent additional information was provided by the yield on ten-year US government bonds — one of the key benchmarks for the global capital market.

The proposed explanation relates to investor behaviour. A holder of a dollar-pegged stablecoin may compare the return on a DeFi deposit with the return on more traditional instruments. When interest rates outside the crypto market change, some capital shifts between options, the utilisation of Aave pools rises or falls, and the built-in algorithm adjusts the cost of borrowing.

For volatile assets such as Bitcoin and Ether, the study found no such correlation. Their holders are more focused on potential price movements of the cryptocurrency itself, which can significantly exceed fluctuations in bond yields.

Why this matters

DeFi is often described as a separate financial system that operates without banks or a central operator. The study reveals a more complex picture: technical decentralisation does not negate economic dependence on the broader capital market. Users compare the yields of different instruments, and through their decisions, traditional interest rates can influence cryptocurrency pools.

For depositors and borrowers, this means that changes in government bond yields can serve as a useful benchmark when assessing future rates on stablecoins. However, this observed pattern does not make such products equivalent to bank deposits or government securities.

The risks associated with DeFi remain distinct and significant. A smart contract may contain a vulnerability, the price of collateral can plummet, and automatic liquidation takes place without consultation with the borrower. Users generally have no deposit insurance, and it can be difficult to recover funds following a hack or system failure.

There are also limitations to the analysis itself. It covers a single major protocol and a period of just over three years; therefore, the results cannot automatically be extrapolated to all DeFi platforms and market cycles. The correlation has been identified primarily for stablecoins, and the observed co-movements do not prove that it is bond yields specifically that directly cause changes in Aave rates. There may be common factors at play — inflation expectations, monetary policy and demand for liquidity.

Source

Siddharth M. Bhambhwani. DeFi interest rates and treasury yields. Finance Research Letters, 2026. DOI: 10.1016/j.frl.2026.110678.

Explanation of methodology and results: an interview with the study’s author by Pennsylvania State University.