Crypto deleveraging inverts monetary transmission to DeFi rates

Analyzing Aave protocol data from January 2021 to January 2026, the authors evaluate how monetary policy transmits to USDC, USDT, and DAI lending pools.

While Aave deposit rates averaged 100 basis points above the federal funds rate, they frequently moved in reverse during tightening cycles.

Between March and September 2022, the Fed raised rates by 525 basis points while DeFi deposit rates dropped from 2.5 percent to 0.5 percent.

A Bayesian proxy-VAR shows that a 100-basis-point shock to the two-year Treasury yield reduces both borrowing and liquidity supply by about 1 percentage point.

For USDC, supply contracts faster than borrowing, raising rates initially, while for USDT borrowing plunges faster, depressing yields.

Granular blockchain data reveals that limits to arbitrage and Ethereum gas fees prolong rate divergences.

A difference-in-differences analysis tracking 8,985 wallets active solely in USDC—representing 15 percent of pool volume—shows that traditional finance-connected liquidity providers reduce Aave supply by 1 to 2 percentage points more following policy hikes.

When deposit rate spreads stand between 5 and 25 percent, elevated transaction fees significantly slow capital reallocation, whereas spreads above 30 percent decay rapidly as arbitrage profits overcome frictions.