ECB Paper Finds Fed Rate Signals Transmit Poorly to DeFi Stablecoin Yields

An ECB working paper by Andrea Barbon, Jean Barthélemy, and Benoit Nguyen examines whether Federal Reserve monetary policy passes through to interest rates earned on USD-pegged stablecoins deposited in decentralised finance (DeFi) lending protocols. Covering the period 2021 to 2026 and drawing on granular on-chain data from Aave, the largest DeFi lending protocol, the authors find that transmission is weak, unstable, and sometimes perverse in the short run.

The paper establishes four empirical facts. Over the study period, the average spread between DeFi deposit rates and the Federal funds rate was approximately 100 basis points, but with high volatility and prolonged stretches where DeFi rates sat materially below policy rates. Around rate decisions, DeFi rates occasionally moved in the opposite direction to the Fed’s action. That anomalous movement appears correlated with Bitcoin price returns. Over the medium run, however, DeFi rates do eventually converge toward risk-free rates, a finding the authors support with cointegration tests and error-correction models.

Two mechanisms explain the pattern. An interest-rate arbitrage channel exists, but it is constrained by frictions that limit investors’ ability to move capital between traditional finance and DeFi. A leverage channel also operates: when a rate shock moves crypto asset prices, borrowers using DeFi to fund positions in assets such as Bitcoin adjust their leverage, which pushes stablecoin deposit rates in a direction that can temporarily offset or reverse the arbitrage signal. High-frequency blockchain data confirm that large, active arbitrageurs capable of bridging the two markets are not yet present in sufficient numbers to eliminate these frictions quickly. The authors note the paper represents their own views and not those of the ECB.