DeFi players seize on bond market

DeFi players seize on bond market

As yields on 30-year Treasuries hit their highest level since 2007, agile players in decentralised finance are seizing on lucrative trades in the bond market.

While the move is a signal of weakness in global economies, yields of over 5.5% on short-dated bonds have lured DeFi juggernauts such as MakerDAO, the fourth-largest protocol with $4.5 billion of investor deposits.

Over the last year, MakerDAO has prioritized a bold strategy, which includes holding US Treasury bonds and generating yield by lending out its Dai stablecoin.

With the dollar-pegged Dai stablecoin, MakerDAO is able to offer its users high yields in DeFi through its dollar-pegged Dai stablecoin, while still generating a healthy profit for the protocol.

The makerDAO's strategy appears to be working. The protocol was to generate an annual profit of about $23 million at the start of the year, according to MakerDAO analytics platform It has now more than tripled to $73 million.

Ragsdale notes, if rates keep rising, the profitability of Maker's carry trade on newly purchased US treasuries rises.

At the same time, MakerDAO's income is routed back to Daiholders through the eDSR, or increased Dai savings rate, a mechanism where Dai holders can lock up their tokens to earn yield. The eDSR produces a 5% annual return.

Frax Finance, another DeFi protocol that emits its own stablecoin, passed a governance vote yesterday to implement a similar system like the Dai savings rate, but for its own stablecoin, Frax. Like MakerDAO, the Frax yield comes primarily from the protocol's bond holdings through outside individuals.

The high interest rate environment is a key catalyst for innovation in interest-bearing stablecoins such as Dai and Frax, Wan said.

And it's not just stablecoins that are suffering.

The high-rate environment impacts thebroader DeFi ecosystem, including havens like MakerDAO and Frax.

Investor deposits at DeFi are down 77% from their 2021 highs, according to data from DefiLlama. The trading volume of decentralised exchanges has also shattered.

Ragsdale said that further rate hikes will be more harmful to non-Maker protocols that can't take advantage of them.

Tadeo, developer relations manager for MakerDAO's Spark Protocol, shares a similar view.