In this data-driven exploration, we dive into the lending yields of stablecoins on Compound Finance V2, one of the leading decentralized finance (DeFi) protocols. Our goal is to understand the performance, volatility, and underlying drivers of yield generation in the DeFi lending space — particularly for low-risk, over-collateralized stablecoin loans.
While the collapse of algorithmic stablecoins like TerraUSD (UST) has raised concerns about stability in the crypto ecosystem, this analysis focuses exclusively on centralized, fiat-backed stablecoins — primarily USDT and USDC — and their behavior within DeFi lending markets.
We find compelling evidence that stablecoin lending in DeFi can outperform traditional financial (TradFi) "risk-free" investments, even after accounting for market cycles and volatility.
Understanding Stablecoin Lending Yields on Compound
Users who deposit assets into Compound’s liquidity pools earn interest based on the protocol’s dynamic interest rate model. The total return can be calculated using the exchangeRate, which reflects how much a lender’s share of the pool is worth over time.
From time T1 to T2, the return is:
R(T1,T2) = exchangeRate(T2) / exchangeRate(T1) - 1To annualize this return under continuous compounding:
Y(T1,T2) = [log(exchangeRate(T2)) - log(exchangeRate(T1))] / (T2 - T1)Compound supports multiple stablecoins including USDT, USDC, DAI, and FEI. However, we focus on USDT and USDC, which together dominate over 70% of the total stablecoin market cap — with $80 billion and $53 billion respectively as of 2025.
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Daily yield data shows significant fluctuations, while weekly, monthly, and semi-annual yields offer smoother trends. Both USDT and USDC exhibit similar patterns: high yields and high volatility during early 2021. This suggests systemic forces are shaping returns across the entire stablecoin lending market.
What Drives Stablecoin Lending Yields?
Several macro factors influence demand for borrowing stablecoins in DeFi:
- Bitcoin (BTC) and Ethereum (ETH) price movements
- Market volatility
- Leverage cycles in crypto trading
When BTC or ETH enters an upward trend, traders often borrow stablecoins from pools to buy more crypto, then use that crypto as collateral to borrow again — creating a leveraged loop. Higher market volatility also increases trading activity across centralized and decentralized exchanges, boosting demand for stable liquidity.
To quantify these effects, we conducted a linear regression analysis to assess how much of the yield variation can be explained by price and volatility data.
Using R-squared scores (ranging from 0% to 100%), we measured explanatory power:
| Market Data | USDC R² | USDT R² |
|---|---|---|
| BTC Price & Volatility | 16% | 11% |
| ETH Price & Volatility | 18% | 17% |
Interestingly, ETH market data explains more yield variance than BTC, likely due to Ethereum’s deeper integration with DeFi applications since 2021.
But even combined, these factors explain less than 20% of yield behavior — meaning most of the movement remains unaccounted for.
Expanding the Model: Supply and Momentum Signals
To improve our model, we introduced two additional variables:
- Stablecoin supply on Compound — reflecting available liquidity.
- MACD (Moving Average Convergence Divergence) — a technical indicator signaling momentum shifts in BTC and ETH prices.
The results were striking:
- Including supply data alone pushed R-squared scores to around 60% for both USDC and USDT.
- Adding MACD signals further increased explanatory power to 60–70%, especially in the ETH market.
This confirms that:
- Supply scarcity directly impacts yield levels — aligning with basic economic principles.
- Momentum trading behavior plays a measurable role, particularly in Ethereum-based strategies.
For example, regression results show that:
- Higher ETH price and volatility correlate with lower USDC lending yields (due to increased supply or reduced borrowing demand).
- Stronger MACD signals (indicating bullish momentum) correlate with higher yields — suggesting traders anticipate leverage opportunities.
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FAQ: Common Questions About Stablecoin Yields
Q: Are stablecoin yields in DeFi truly "low-risk"?
A: Within the DeFi context, stablecoin lending is considered low-risk because it's over-collateralized and backed by transparent smart contracts. However, risks include smart contract vulnerabilities, oracle failures, and regulatory uncertainty — so they are not risk-free in absolute terms.
Q: Why are USDT and USDC yields higher than traditional savings accounts?
A: Unlike TradFi systems constrained by monetary policy and bank intermediaries, DeFi yields are driven by real-time supply and demand. Limited stablecoin supply relative to growing DeFi adoption creates competitive borrowing pressure — pushing rates up.
Q: Can these high yields last long-term?
A: Sustained high yields depend on continued demand for leverage in crypto markets and controlled growth of stablecoin supply. If stablecoin issuance accelerates faster than demand, yields will compress — just like in traditional money markets.
Q: How does volatility affect lending returns?
A: High volatility increases borrowing demand for hedging and speculation, temporarily boosting yields. But extreme events may trigger liquidations or protocol freezes — introducing execution risk despite high nominal returns.
Q: Is there a better alternative to Compound for stablecoin lending?
A: Platforms like Aave and Yearn offer competitive rates, but Compound remains a benchmark due to its transparency and longevity. Yield optimization depends on individual risk tolerance, platform audits, and real-time rate comparisons.
Comparing DeFi Yields vs. Traditional Finance
To assess relative performance, we compared Compound’s USDC and USDT lending yields against the General Collateral (GC) repo rate — a widely accepted proxy for risk-free returns in TradFi, backed by U.S. Treasury collateral.
All portfolios started at $100 on May 1, 2020, and ended on May 1, 2025.
- GC Rate Portfolio: Grew marginally — nearly flat.
- USDC Lending: Achieved an average annual yield of 3.71%.
- USDT Lending: Delivered 4.51% annually.
Over five years, this compounds into a dramatic difference:
- GC-based investment: ~$100 → $100.40
- USDC lending: ~$100 → $120+
- USDT lending: ~$100 → $125+
Even compared to 2-year U.S. Treasury yields (~0.2% average during the period), DeFi stablecoin lending delivered over 20x higher returns.
Why DeFi Outperforms TradFi
Two key reasons explain this yield gap:
- Slow Growth of Stablecoin Supply Relative to Demand: Despite rapid expansion of DeFi ecosystems, new issuance of USDC and USDT has not kept pace with borrowing demand — maintaining upward pressure on yields.
- Massive Credit Expansion in TradFi: Post-pandemic monetary policy flooded traditional markets with liquidity, driving government bond yields to historic lows.
Smart contract risk remains a concern, but for users comfortable with self-custody and blockchain technology, DeFi offers a compelling alternative to near-zero savings rates.
Final Thoughts
This analysis reveals that stablecoin lending yields in DeFi — while volatile — follow predictable patterns influenced by:
- Cryptocurrency prices
- Market volatility
- Stablecoin supply dynamics
- Momentum-driven trading activity
Core keywords naturally integrated throughout include: stablecoin, DeFi, lending yield, USDT, USDC, Compound Finance, crypto lending, and yield comparison.
The data clearly shows that over the past five years, even conservative strategies like stablecoin lending have significantly outperformed traditional risk-free assets.
As blockchain infrastructure matures and institutional participation grows, these opportunities may evolve — but for now, DeFi continues to redefine what "risk-free" return means in a digital economy.
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