Crypto is sliding back toward this year’s lows. The Binance hack hit an already fragile market: repeated attempts to reclaim the 2025 highs had failed, and the AI repricing added pressure the market couldn’t absorb. BTC broke below $70,000 this morning, and the biggest LPs are now pulling back to wait out the macro slide rather than buy the dip.

When balance sheets turn defensive, capital buys safety and gives up yield. In DeFi, that means stablecoins pile into blue-chip BTC and ETH lending vaults, and the extra supply pushes borrowing costs down.

Current market pricing points the other way. CDOR, the CoinDesk Aave overnight borrow rate, has nearly doubled since its March lows and is still rising. Traders have also almost fully priced in a December rate hike, which many expect to lift DeFi rates further. We disagree with that consensus, for three reasons.

1. The Binance Hack Changed Sentiment

The hack was handled quickly, but the psychological damage remains. Non-crypto companies had begun launching yield and leverage products. After the market came through the Kelp DAO episode in the spring, many concluded the worst was behind us and returned to DeFi.

A breach at the world’s largest centralized exchange brings back the question of where crypto can be held safely. DeFi protocols came through the event without incident, which supports the case that DeFi can be a safer place to store, trade and earn on assets for users who know how to operate in it. We expect the pullback to be temporary, but we think activity will stay materially lower for the rest of 2026. 

2. Aave Is De-Risking

Aave has proposed two major changes to its V3 risk framework: remove most tail assets and impose withdrawal rate limits.

Both measures directly reduce risk and strengthen the case for blue-chip lending on Aave among conservative allocators. Lower tail risk removes one of the main reasons institutional LPs have stayed out of the market.

3. LPs Want Simple, Safe Vaults

Our conversations with large crypto LPs this week showed a consistent preference for simple blue-chip vaults that they can explain under pressure, along with declining interest in complex structures.

This rotation coincides with falling demand for leverage, which means riskier strategies are losing depositors and borrowers at the same time.

Implications for Strategies

We expect DeFi stablecoin borrowing costs to fall below SOFR, even if the Fed hikes in December. This scenario would benefit two strategies in particular:

• BTC Earn strategies: borrow stablecoins cheaply, deploy into higher-yielding RWAs, and capture the spread.

• RWA looping strategies: lower funding costs widen the spread.

Yield-bearing stablecoin loops are likely to underperform. YBS yields tend to track borrow rates, so cheaper funding also means lower returns on the collateral side.

It’s been a brutal year, and the last weeks may be harder. If you are sitting in stables through year-end, don’t count on DeFi rates to help. We expect them to settle below the risk-free rate.