The first quarter of 2025 tells a clear story about DeFi's evolution. While yields across major lending platforms have compressed significantly, innovation at the market's edges demonstrates DeFi's continued maturation and growth.

Despite falling yields, major stablecoin vaults have experienced extraordinary growth:

The first quarter of 2025 saw a clear narrative emerge in DeFi: yields compressed significantly across major lending platforms, but innovation at the market's edges demonstrated continued maturation and growth.

The Great Yield Compression

DeFi yields declined sharply across all major lending platforms:

This compression signaled a market that had cooled considerably from late-2024's exuberance, with reduced borrower demand across main platforms.

TVL Paradox: Growth Despite Lower Yields

Despite falling yields, major stablecoin vaults saw impressive growth:

With yields declining from nearly 15% to under 5%, one might expect capital to shift. However, the persistence of large vaunt TVL even with lower yields showcased institutional capital's increasing presence and comfort with DeFi protocols as legitimate financial infrastructure, not speculative vehicles.

Curators: DeFi's New Asset Managers

The emergence of curators was a significant development in DeFi lending. Protocols like Morpho and Euler saw individuals build, manage, and optimize lending vaults.

These curators acted as DeFi asset managers, evaluating markets, setting risk parameters, and optimizing capital allocation for enhanced returns. Unlike traditional service providers who advised protocols, curators actively managed capital deployment across lending opportunities.

On platforms like Morpho and Euler, curators handled risk management functions: selecting assets for collateral, setting LTV ratios, choosing oracle price feeds, and setting supply caps. They essentially built targeted lending strategies optimized for specific risk-reward profiles, sitting between passive lenders and sources of yield.

Firms like Gauntlet, previously providing services to protocols like Aave or Compound, now directly managed nearly $750 million in TVL across several protocols. With performance fees ranging from 0-15%, this could mean around $100-750 million in annual revenue, offering significantly more upside than traditional service arrangements. According to a Morpho dashboard, curators had generated nearly 3 million in revenue and based on Q1 revenue are on track to do 7.8mm in 2025.

The most successful curator strategies maintained higher yields, primarily by accepting higher-yielding collaterals at more aggressive LTV ratios, especially leveraging Pendle LP tokens. This approach demanded sophisticated risk management but delivered superior returns in the current compressed environment.

As a point of comparison, yields on the largest USDC vaults on both Morpho and Euler outperformed the vaults.fyi benchmark, showing 5-8% base yields and 6-12% yields inclusive of token rewards.

Protocol Stratification: A Layered Market

The compressed environment had created a distinct market structure:

1. Blue-chip Infrastructure (Aave, Compound, Sky)

2. Infrastructure Optimizers & Strategy Providers

This two-tier relationship created a more dynamic market where strategy providers could rapidly iterate on yield opportunities without building core infrastructure. The yields ultimately available to users depended on both the efficiency of the base protocol and the sophistication of strategies deployed on top.

This restructured market meant users now navigated a more complex landscape, with the relationship between protocols and strategies determining yield potential. While blue-chip protocols offered simplicity and safety, the combination of optimizing protocols and specialized strategies provided yields comparable to what previously existed on platforms like Aave or Compound during higher rate environments.

Chain by Chain: Where Yields Now Live

Despite the emergence of L2s and alternative L1s, Ethereum mainnet still hosted many of the top yield opportunities, both inclusive and exclusive of token incentives. This persistence of Ethereum's yield advantage was notable in a market where incentive programs often shifted yield-seeking capital to newer chains.

Among mature chains (Ethereum, Arbitrum, Base, Polygon, Optimism), yields remained largely depressed across the board. Outside of mainnet, most of the attractive yield opportunities were concentrated on Base, highlighting its emerging role as a secondary yield hub.

Newer chains with substantial incentive programs (like Berachain and Sonic) displayed elevated yields, but the sustainability of these rates was questionable as incentives eventually diminished.

The DeFi Mullet: FinTech in the Front, DeFi in the Back

A significant development this quarter was Coinbase's introduction of Bitcoin-collateralized loans powered by Morpho on its Base network. This integration marked the emerging “DeFi Mullet” thesis - fintech interfaces in the front, DeFi infrastructure in the back.

As Coinbase's head of Consumer Products Max Branzburg stated: “This is a moment where we’re planting a flag that Coinbase is coming on-chain, and we’re bringing millions of users with their billions of dollars.” The integration brought Morpho's lending capabilities directly into Coinbase's user interface, allowing users to borrow up to $100,000 in USDC against their bitcoin holdings.

This approach embodied the view that billions would eventually use Ethereum and DeFi protocols without even knowing it - just as they use TCP/IP today without awareness. Traditional FinTech companies would increasingly adopt this strategy, keeping familiar interfaces while leveraging DeFi'