The shift to more fixed rate products is particularly relevant for institutional investors seeking both growth potential and risk mitigation, aligning more closely with the structured, regulated offerings they are accustomed to in traditional finance.

In this article, we will highlight DeFi products that are gaining popularity to satisfy the demand for reliable and predictable returns: yield markets and fixed-term loans. These products offer different approaches to generating stable yields and can be used by institutions to provide a baseline returns or hedges for their DeFi portfolios.

DeFi Landscape Overview

DeFi encompasses a broad ecosystem of decentralized applications that provide financial services without traditional intermediaries. For institutions used to predictable yield instruments like bonds or fixed-income funds, understanding the yield landscape in DeFi is essential. Broadly, there are two main categories:

• Variable Yields: These include lending protocols (e.g., Aave, Compound) and liquidity mining programs. The yield here is typically influenced by supply-demand dynamics, protocol incentives, or fluctuating market conditions. While these strategies can offer attractive returns, the variability makes them less appealing for institutions seeking stable yield streams.

• Fixed Yields: As DeFi matures, protocols with products that bring greater predictability, analogous to fixed-income products in traditional finance have begun to gain more traction. This can take the form of tokenized yield, where the income stream is separated from the principal, or fixed-rate lending platforms that lock in an interest rate for a set period.

From a traditional finance perspective, many of these DeFi solutions can be viewed as digital equivalents of bonds or other structured products. They package risk, yield, and maturity in ways that mirror the risk-return profiles familiar to institutional investors.

Key Players in DeFi Fixed Yield

Yield Markets

Yield markets enable the tokenization of yield-bearing assets, effectively separating the asset’s principal from its yield. This process typically creates two tradable tokens:

• Principal Token (PT): Represents the underlying asset’s principal value. This token holds intrinsic worth because it can be redeemed for the principal at maturity, similar to how a zero-coupon bond is redeemed at face value when it reaches its maturity date.

• Yield Token (YT): Represents the right to earn the yield generated by the underlying asset over a specified period. The YT’s value depends on factors such as the interest rate environment, time to maturity, and the performance of the underlying protocol.

Source: Pendle

For institutional investors, yield markets offer a new way to earn more predictable returns by holding the principal side of the asset. Because many DeFi participants have a higher risk-return tolerance and are willing to buy Yield Tokens (YT) for potentially higher variable returns, demand for YT can be strong. This can be seen in current PT rates on Pendle in the image above. This demand, in turn, allows institutional investors who hold Principal Tokens (PT) to capture attractive fixed yields.

A PT effectively acts like a zero-coupon bond: it can be redeemed at maturity for the underlying principal, thus providing a stable, predictable payoff. This structure mirrors certain types of structured financial products in TradFi, including Treasury STRIPS in the U.S. market, where coupons and principal are separated and traded independently. By isolating the principal, investors lock in a predictable payout at maturity while other market participants focus on the coupon stream. Additionally, this separation enables sophisticated hedging strategies in a broader portfolio.

Fixed Rate Lending

Fixed-rate lending protocols such as Term Finance address another critical need in the DeFi fixed-yield space by offering on-chain fixed-rate loans determined through an auction mechanism. Rather than relying on a purely algorithmic model or variable rates that shift with market liquidity, Term Finance facilitates a competitive bidding process where lenders and borrowers collectively discover the most efficient interest rate for a given term duration. This approach not only provides institutional investors with greater certainty about their borrowing or lending costs, but also ensures that the fixed rate reflects real-time market conditions in a transparent, decentralized manner.

Source: IntoTheBlock Term Finance Risk Radar

The chart above illustrates the historical clearing rates from Term Finance’s auction process for WETH. Over the specified timeframe, rates have fluctuated in response to changes in supply and demand for liquidity, demonstrating how the auction mechanism continuously finds a real-time market rate for fixed-term loans.

A cornerstone of Term Finance’s approach is over-collateralization, which mitigates default risk in a trust-minimized environment. By locking in a fixed rate through the auction mechanism, lenders enjoy predictable returns over the entire term, insulating them from market-driven interest rate swings. Borrowers, especially those employing leverage, benefit from knowing their borrowing costs remain constant regardless of market conditions. After depositing collateral (e.g., ETH, stablecoins, or other high-liquidity assets), borrowers risk liquidation only if the collateral’s value falls below a certain threshold. This provides lenders with significant protection for their principal, while granting borrowers the flexibility to plan their leveraged positions with more certainty than variable-rate alternatives.

In traditional financial markets, Term Finance’s fixed-rate structure parallels the bond issuance or syndicated loan process, where interest rates are determined by the collective bidding of investors. However, unlike conventional bond auctions — often reliant on underwriters and centralized platforms — Term Finance uses decentralized technology to facilitate transparent, real-time rate discovery. This transparency can offer participants clearer insights into borrower demand and lender risk appetite while eliminating the need for multiple intermediaries.

Market and Economic Risks

Although fixed-yield structures in DeFi can mitigate exposure to fluctuating interest rates, they are not free from broader market and economic risks. Institutional investors should consider the following:

• Price Fluctuations for PT: Principal Tokens (PT) may trade at a premium or discount relative to their eventual redemption value, influenced by the underlying asset’s volatility, the time remaining until maturity, and the overall DeFi interest rate environment. As a result, the market price of PT can fluctuate before maturity, potentially introducing interim mark-to-market losses.

• Yield Uncertainty for YT Holders: While institutions looking for stable returns often hold PT, yield-bearing tokens (YT) can experience their own form of volatility based on factors like protocol performance and broader market sentiment. YT holders may seek out PT holders as counterparties for fixed-yield arrangements, but swings in demand for YT can indirectly affect PT valuations.

• Collateral Liquidity and Liquidation Risks: Protocols like Term Finance require borrowers to over-collateralize their loans. However, collateral can still become illiquid or decline in value rapidly, especially during major market sell-offs. If liquidators cannot sell collateral promptly or at sufficient prices to cover the debt, lenders may face shortfalls. Institutions should assess the liquidity and volatility of any collateral accepted in these structures to ensure they can withstand sudden market downturns.

Source: IntoTheBlock Term Finance Risk Radar

• Auction Inefficiencies: market auctions Term Finance are sealed single-shot auctions. This can lead to a disconnect in the total amount of cleared loans in an auction (as seen in the chart above). A slight mismatch in rate expectations can mean much of the loan amounts will not clear. With set auction periods where lenders receive no interest, opportunity costs can arise and reduce potential lender and borrower returns.

• Market Liquidity Constraints: Even in protocols with high TVL, market liquidity can dry up during periods of high volatility. This can hinder the ability to exit positions, rebalance portfolios, or liquidate collateral quickly, raising the potential for losses. Conducting due diligence on trading volumes, depth of liquidity, and the breadth of market participants is essential for institutions before allocating capital.

Stabilizing Yield Volatility

Fixed yields can serve as a powerful mechanism for institutions to stabilize their DeFi portfolios and reduce overall volatility. By locking in a predictable income stream, these instruments can balance the unpredictable returns from more speculative DeFi assets. Additionally, fixed-rate products can function as a strategic hedge within a larger portfolio. If market conditions turn unfavorable or token prices begin to fluctuate wildly, the steady yield from these fixed-rate instruments can help offset potential losses elsewhere. Over time, this balancing act can smooth out returns, making the aggregated yield of a DeFi portfolio more consistent.

While fixed-rate DeFi solutions may feel similar to established structures in traditional finance, DeFi markets operate under different mechanics and risks. Protocol designs, liquidity dynamics, and underlying collateral behaviors can diverge from what would be expected in conventional markets. As a result, using on-chain analytics, specialized risk assessments, and purpose-built DeFi tools are key to managing these unique challenges.