What should be the reasonable interest rate for DeFi?

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The KelpDAO cross-chain bridge hack and the subsequent contagion risk to Aave force us to rethink the interest rate problem in DeFi. This article is based on the X analysis "What should DeFi Rates really be?" by Tom Dunleavy, compiled and reorganized by ForesightNews. (Context: dYdX Foundation CEO predicts: "DeFi Summer" frenzy will begin in September, lasting longer than 2020) (Background: Looking back at the glory of DeFi Summer: Is version 2.0 about to ignite a new bull market?) KelpDAO suffered a $292 million cross-chain bridge hack, with risks spreading to Aave, causing $13 billion in Total Value Locked (TVL) to evaporate within 48 hours. If you are earning only 5% yield by depositing USDC in money markets, the key question is not whether DeFi is risky, but whether your yield matches the risks you are taking. This article breaks down this issue using bond pricing logic. Two weeks ago, attackers stole $292 million from KelpDAO. The stolen rsETH was subsequently re-deposited into Aave V3 as collateral, directly causing Aave to incur approximately $196 million in bad debt. In just three days, Aave's TVL plummeted from $26.4 billion to $17.9 billion. Two weeks prior to that, the Solana ecosystem's Drift Protocol lost $285 million due to a social engineering attack on an administrator's private key by North Korean hackers, a plot that could be traced back to the fall of 2025. Two major security incidents occurred within just three weeks, causing a total loss of $577 million. Affected by a risk-driven bank run, the capital utilization rate of Aave's USDC lending market reached 99.87% for four consecutive days, and deposit rates soared to 12.4%. Circle Chief Economist Gordon Liao even initiated a governance proposal to increase borrowing caps by four times to alleviate withdrawal demand. A month ago, a large number of users deposited stablecoins into DeFi money markets, earning only 4%–6% APY. Everyone now needs to face a core question: Is this type of yield pricing reasonable? Weeks before the KelpDAO incident, Santiago R Santos questioned on the Blockworks podcast: In DeFi, we have long taken on high risks without ever receiving adequate risk compensation. In the future, reasonable risk spreads for various assets should be redefined. The yield of all corporate bonds is composed of multi-layered risk compensation. The core pricing formula is as follows: · Yield = Rf + [PD x LGD] + Risk Premium + Liquidity Premium · Rf is the risk-free rate, benchmarked against duration-matched US Treasury yields. PD × LGD is the Expected Loss = Probability of Default × Loss Given Default, where LGD = 1 – Recovery Rate. The risk premium compensates for uncertainties beyond expected losses; even if two assets have identical PD and LGD, pricing will differ if their risk outcome volatility ranges vary. Liquidity premium refers to the additional costs incurred from selling assets at a discount or exiting positions. Combining long-term historical data from Moody's since 1920, the reference benchmarks are as follows: · The long-term average annual default rate for US speculative-grade bonds is 4.5%, 3.2% for the last twelve months, and is expected to rise to 4.1% in Q1 2026; · The historical average recovery rate for senior unsecured high-yield bonds is about 40%, corresponding to an LGD of about 60%; · Long-term annualized expected loss for high-yield bonds: 4.5% × 60% = 2.7%; · In the private credit sector, KBRA predicts a 3.0% default rate for direct lending in 2026, with an average recovery rate of about 48% for default cases in 2023–2024; · The historical recovery rate range for senior secured leveraged loans is 65%–75%. Let's look at the current actual data. The 10-year US Treasury yield closed at 4.29% last Wednesday. Simultaneously, we capture the ICE BofA Option-Adjusted Spread for all credit categories in April 2026. The pricing logic is clear and consistent with common sense: moving down the capital hierarchy from Treasuries, investment-grade bonds, speculative-grade bonds, to subordinate commercial real estate assets, yields rise in tandem to compensate for increasing default probabilities and loss magnitudes. Private direct lending yields remain around 9%, not because borrower default rates are higher, but primarily because non-standard private assets have

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Published:2026-05-01 06:06:51

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