UNIVERSITY PARK, Pa. — With the rise in popularity of the digital assets known as cryptocurrencies over the last decade, the idea of a decentralized financial system that operates outside of traditional markets is gaining mainstream appeal. A new analysis from a Penn State researcher, however, suggests that the traditional and decentralized markets are more connected than they might seem.
Siddharth Bhambhwani , assistant clinical professor of accounting at Penn State's Smeal College of Business, compared borrowing and deposit rates from Aave, a popular decentralized finance platform that offers peer-to-peer cryptocurrency lending, to U.S. Treasury yields between January 2023 and March 2026. He found that Treasury yields significantly influence rates on cryptocurrency lending markets, despite the fact that there is no direct link between the two markets.
Bhambhwani published his findings in the journal Finance Research Letters .
In the following Q&A, Bhambhwani explained how decentralized finance lending typically operates and how the connection to traditional financial systems might shape investors' perceptions of this growing market.
Bhambhwani: Decentralized finance, or DeFi, allows people to borrow and lend digital assets without going through a traditional financial institution such as a bank. Instead, transactions are handled through computer programs called "smart contracts" that operate on a blockchain, which is a shared ledger that many computers maintain at once, with no single owner.
A simple way to think about it is as a marketplace with pools of digital assets. Some users deposit assets into those pools and earn interest, while other users borrow from the pools and pay interest. Unlike a conventional bank loan, though, DeFi borrowing generally requires borrowers to put up cryptocurrency worth more than the amount they borrow as collateral. To borrow eighty dollars, we might have to lock up one hundred dollars of another asset. If our collateral falls close to the borrowed amount plus accrued interest, the software sells it automatically and repays the loan.
Bhambhwani: One attraction is accessibility. A DeFi program, known as a protocol, generally does not evaluate a borrower's credit score, income or employment history in the way a bank might. If a user has the necessary digital assets and meets the protocol's collateral requirements, the transaction can occur automatically. DeFi markets also operate around the clock and can be accessed from many parts of the world without opening a conventional bank account.
For depositors, the main attractions are yield and access. Deposits based on stablecoins — cryptocurrencies that are designed to maintain a steady price by being tied to a traditional asset, most often the U.S. dollar — have often paid substantially more than traditional bank savings accounts, while users can participate without many of the account requirements associated with conventional banking.
Transactions can also settle quickly, and the rules governing major DeFi protocols are encoded in smart contracts that anyone can inspect as the code behind them is public. But these benefits come with substantial risks. Smart contracts can contain vulnerabilities and have been exploited. Users also generally do not have deposit insurance, and recovering funds after a hack or failure can be difficult.
Bhambhwani: A bank generally decides what rate it will pay on savings accounts based on factors such as market interest rates, competition for deposits and its own funding needs. Treasury yields, meanwhile, are determined in financial markets as investors buy and sell U.S. government securities, and they respond to broader expectations about inflation, economic growth and monetary policy.
On a DeFi platform, the process is mechanical. Rates are determined by utilization, which is calculated using the ratio of assets borrowed from a pool to assets deposited into the pool. If relatively little is being borrowed, rates tend to be lower, and vice versa. While this system is not directly linked to traditional markets by design, my study found that Treasury yields and DeFi rates are nevertheless connected.
Bhambhwani: For stablecoins, Treasury yields and DeFi rates move together in a systematic way. When Treasury yields rise, stablecoin borrowing and deposit rates tend to rise with them. I found that a quarter-point move in the U.S. 10-year yield is associated with about a one-point move in stablecoin borrowing rates.
The connection is strong, though somewhat indirect. A stablecoin is designed to track the U.S. dollar, so a stablecoin depositor is making a direct comparison: I can hold this token and earn the DeFi rate, or I can hold Treasury securities and earn the Treasury rate. When the outside opportunity changes, capital reallocates, utilization shifts and the DeFi rate adjusts even though nothing in the protocol's code references the Treasury market.
The findings do not hold for volatile crypto assets like Bitcoin and Ethereum, though, as someone depositing Bitcoin is not really making that comparison. They're primarily looking at Bitcoin's expected return, and a percentage point change in Treasury yields is just noise compared to the often large and rapid changes in the price of Bitcoin, which can sometimes rise or fall by over 10% in a single day.
Bhambhwani: The 10-year Treasury yield is one of the most closely watched interest rates in the world. It reflects investors' views about economic conditions over a relatively long horizon and serves as an important benchmark throughout financial markets. Changes in the 10-year yield are associated with changes in borrowing costs and asset valuations across areas ranging from mortgages and corporate debt to stocks and other investments.
That makes its relationship with DeFi particularly interesting. DeFi loans do not have a conventional contractual maturity as they are active as long as a borrower's collateral is greater than the borrowed amount. Yet among the Treasury maturities I examine, the 10-year yield provides the most consistent additional information about stablecoin rates.
These results suggest that DeFi stablecoin markets are responding to some of the same broader financial conditions captured by this major traditional-market benchmark. That is important because DeFi is sometimes viewed as a largely separate financial ecosystem driven primarily by cryptocurrency-specific factors.
For someone lending or borrowing stablecoins through DeFi, traditional interest rates may therefore provide useful context for understanding where DeFi rates are heading. More broadly, as decentralized finance develops, we may increasingly find that traditional and decentralized markets are not two completely separate financial systems, but interconnected parts of a larger market for capital.
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