Architecting DeFi’s Yield Curve | DAS New York

Transcript

Hey all, Blockworks co-founder Michael Ippolito here. Quick break to talk about something we've just launched, Blockworks Investor Relations. As the market shifts toward institutional capital, investors want more transparency, more standardization, and a higher level of professionalism. But, the traditional IR model is slow, manual, and not built for how crypto works. If you're building on chain, your data's already live, your business is already transparent. The challenge is turning that into a clear, credible story for investors. That's exactly what we're solving with Blockworks IR. It's a single platform that brings together real-time analytics, branded investor portals, and hands-on advisory support, so you can communicate what matters. If you're an on-chain business looking to level up your investor strategy, check out Blockworks Investor Relations at

blockworks.com/investor-relations. All right, back to the episode. Nothing said on ZeroEx Research is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only, and any views expressed by anyone on the show are solely our opinions, not financial advice. Bocartio, Ryan, and our guests may hold positions in the companies, funds, or projects discussed. Good morning, everyone. Hope you're having a fantastic day two at the Digital Asset Summit. My name is Luke Laser. I'm the head of research here at Blockworks, and today I'll be talking to you about DeFi's yield curve, how it was built, and what it can

signal. In traditional markets, yield curves and term structures are foundational, and we see them everywhere. Interest rates, commodity futures, the VIX term structure, plenty of action in all of these markets in recent weeks. These forward markets aren't just used to speculate on the path of the underlying. They're used to hedge both price and duration, to express views on positioning and time horizons and to understand where markets may be headed.

But for much of DeFi's history, we simply didn't have this. We had headline yields measuring what was realized historically, but we lacked an on-chain yield curve of depth and significance for the market to price where crypto's yields would be headed in the future. This has changed over the past year. Today, the building blocks for an on-chain yield curve are in place. The components of which are created, traded, and priced entirely on chain. At the top of this system is Athena.

It takes user deposits and deploys them into a blend of strategies. Treasury bills, stablecoin lending, and delta neutral positions in perpetual futures earning the funding. It's these latter two, stablecoin lending and the futures basis, that importantly capture the carrying cost of leveraged long positioning, with that carry yield passed back to sUSD holders. Historically, this carry yield has been attractive, ranging from 5 to 10%.

Sometimes hitting as high as 25%. With low or zero variance in the principal value, but high variance in the yield, Athena's instruments have found some of their strongest product market fit on Pendle. Historically, we see 20 to 60% of the supply of these instruments traded on Pendle, representing several billion in notional value. Pendle takes the yield-bearing asset, like Athena's sUSD, and splits it into two components.

The principal component functioning as a zero coupon bond with a fixed yield to maturity and the yield strip offering a claim on the underlying instrument's yield into a set expiration. We now have a market not to trade the underlying asset, but rather the expectation of its yield into the future. Rather than just viewing the headline yield, we now have a market that reveals the implied yield. When you line up multiple maturities, you produce an on-chain yield curve, revealing the market's implied path of

yields across various points in time out into the future. Now, just like in traditional markets, the slope of this yield curve can be positive or negative, reflecting classic contango or backwardation. Shown here is an example of the yield curve in backwardation, downward-sloping, with a snapshot from December 2024, revealing that this market was pricing declining yields. Next, we show an example of an upward-sloping yield curve in contango with this snapshot from April 2025.

The back month implied yield is modestly above the front month, revealing that this market was pricing rising yields. But, these are just snapshots of the yield curve at particular points in time. How can we track this slope throughout its history? To do so, we produce the rolling term spread, measured as the difference between the back month implied yield and the front month. Positive values on the term spread reflect contango, while backwardation reflects Sorry, negative values reflect backwardation.

From here, we ask the simple question, does this actually matter? Can the slope of this yield curve tell us anything about where markets are headed? Liquid markets are rich with coin toss opportunities. Can we identify points in time in which the odds might skew in our favor? So, we examined how the term spread relates to forward returns on Bitcoin. And the results are extremely clear. Steep backwardation, or large negative values on the term spread, precede the most negative returns on Bitcoin over the coming 90 days.

Inversely, as we move to the right on the x-axis towards contango and a positive term spread, we see the most positive forward returns on Bitcoin over the coming 90 days. Similarly, this next chart shows what percentage of observations within that term spread bucket recorded positive returns. In nearly 100% of the observations of contango and a positive term spread, forward returns on Bitcoin were positive over the coming 90 days.

And as we move left on the x-axis into backwardation, we see the probability of positive returns collapse. In nearly 0% of the observations of steep backwardation with a term spread value beneath -7%. We saw almost zero positive forward returns. So, if the slope of this yield curve actually matters, what drives its shape? And when can we expect signal? What we find is that the underlying yield regime has a strong inverse relationship with the term spread.

Contango is meaningfully overrepresented in low yield regimes. While backwardation is meaningfully overrepresented in high yield regimes. The front end of this yield curve will consistently move in line with current market conditions. But the back end, holding more duration, consistently points to where yields are expected to normalize on longer time horizons. To this extent, the term structure is simply just a pointer towards mean reversion.

So, if the term spread relates to the underlying yield regime, and it can give us a leading indicator to changes in the price of Bitcoin. Can it give us a forward-looking signal to changes in the underlying yield? And in turn, the cost of carry. Yes. What we show here is the term spread plotted against the forward 90-day change in the underlying yield. And we find a strong positive relationship. Backwardation, shown in the lower left quadrant here, consistently precedes large declines in the underlying yield.

Contango, on the other hand, shown in the upper right quadrant, consistently precedes increases in the underlying yield. To go one step deeper, one might make the assumption that if the pendle market were perfectly efficient in pricing yields, implied yields would track that of the underlying. Or that premiums and discounts would net out. But what we find is that's actually not the case.

In the same way equity option implied volatility almost always prices a premium to realized volatility. Or how dated futures tend to trade at a premium to settle price, we see the same to be true for implied yields on Pendle, almost always commanding a premium to the underlying yield. On Pendle, bond buyers are short the entire right tail of the underlying yield distribution beyond the implied rate. They require a premium for forgoing this exposure.

On the other hand, the yield strip is perhaps the most precise and liquid public market hedge to the carrying cost of levered long inventory financed in either the perpetual futures complex or in on-chain money market like Aave. Yield strip buyers will pay a premium to acquire this hedge. With this, this yield curve reveals the risk premiums created from hedging levered long positioning.

Again, bond buyers receive this premium, frequently realizing fixed returns in excess of the underlying variable yield. When Aave listed the bonds as collateral last summer during a high-yield regime, they saw blockbuster demand, growing from zero to over 5 billion in collateral posted in the span of months. Additionally, the bonds exhibited collateral utilization rates multiples higher than the underlying sUSD itself. Oop, I think this slide's a little broken.

Out of any instrument within crypto listed on a major on-chain money market, it was the sUSD principal tokens that exhibited the highest percentage of their supply to be posted as collateral on an on-chain money market. All of this taken together suggests that high yield Athena bonds may be some of the most attractive financial instruments crypto has to offer. To acquire the bonds or the hedge, one must trade on the yield curve impacting its slope.

To conclude, what we now have in DeFi is something we didn't have before. An on-chain yield curve hyper specific to the on-chain financial system giving us signal into how the cost of carry price level of Bitcoin and all metrics downstream of these might change into the future. All of this research and data you can find at blockworksresearch.com and I'll be at the Blockworks booth later today if you'd like to discuss or see what the yield curve looks like today.

I want to thank you for your time and enjoy the rest of the conference.