From chainlink By Daeil Cha, Product, at Chainlink Labs

Key Takeaways

Tracking Market Conditions With The CDY Index

The fourth quarter of 2024 saw a flurry of activity in DeFi, with increased asset prices, trading volumes, and yields.

Source: defillama.com

Rising prices of digital assets enhanced the borrowing power of those assets; in bull markets, users typically increase leverage and borrow more stablecoins against their collateral tokens. For example, the borrow utilization of USDC on Aave v3 on Ethereum mainnet in Q4 2024 was often markedly above its optimal utilization on the protocol (the red dashed line in the chart below), which was 92% in Q3-Q4 2024. Elevated borrow utilization implies limited liquidity and markedly higher borrowing rates and therefore is a very strong signal of positive sentiment in the market.

Source: Aave v3. Note: Some figures for October were forward-filled due to data unavailability.

As a result, the supply yields for stablecoins increased dramatically as onchain activity spiked. Users can easily track yield activity with the Chainlink DeFi Yield (“CDY”) Indexes, which aggregate yields on the most active DeFi lending markets using Chainlink oracles. The CDY Indexes show that supply yields for USDC and USDT in Q4 2024 averaged 8.37% and 7.13%, respectively, up from 4.16% and 4.40% the previous quarter. 

Source: Chainlink DeFi Yield Index

The CDY Index enables users to easily compare DeFi lending yields to other markets. In Q4, lending yields of USDC and USDT markedly surpassed Treasury yields, which are still somewhat elevated following high inflation in 2021-2022.

Source: Chainlink DeFi Yield Index, U.S. Department of Treasury

While the CDY Index facilitates the comparison of yield markets, users must understand the underpinnings of each market to evaluate their differences. In previous quarters when DeFi lending yields were lower, some protocols increased their exposure to real-world assets (RWAs) partly to gain access to higher yields. As such, one might expect Treasury yields and stablecoin yields to start converging, but this has not been the case. More importantly, the expectation of converging yields between these markets is a misconception for a number of reasons, including the fact that these yields represent fundamentally different things. 

The yield for Treasury bonds is the yield to maturity to the bondholder expressed as an annual figure regardless of the tenor of the bond, whereas the yield in DeFi lending is an annualized floating rate that represents the interest accruing to suppliers of tokens on a block-level basis (the time units can vary by protocol). Simply put, a holder of a Treasury bond is guaranteed an annualized yield until the maturity of the bond, while a supplier on a DeFi lending protocol is guaranteed an annualized yield until the end of a block. Also, Treasuries have a maturity date while most loans on major lending protocols do not. This difference is meaningful because bond prices (and thus the effective yield) can be very sensitive to duration and investors can choose Treasury maturities based on their goals, whereas DeFi lending yields are more suitable to users who have flexible time horizons or short-term liquidity requirements. 

How Asset Managers Can Use The CDY Index

DeFi lending represents a large market for users who are seeking yield on their tokens. As of early 2025, the DeFi lending market holds about $50-60 billion of value (depending on the methodology used to calculate the total value locked (“TVL”) in protocols), with about 60% of that on Ethereum mainnet. DeFi lending yields are determined by borrowing activity, which can be largely driven by the expected returns for crypto assets, so lending yields can become very high in bull markets. In bear markets, lending yields can provide some protection against price depreciation. 

Given the nature of decentralized finance, there is no central repository for DeFi protocols or lending yields. As the market expands and becomes even more fragmented, participants will find it more difficult to understand the prevailing market yields for their tokens.

All protocols on Ethereum mainnet as of January 21, 2025.

The CDY Index solves this problem by aggregating yields on the largest lending markets for major tokens. Staying up-to-date with the lending market is costly and time-consuming; the yields of each protocol, especially those with innovative mechanisms, can be opaque to the average user and not practical to actively manage. Chainlink abstracts this process and continually monitors the most active and emerging lending protocols to ensure the CDY Indexes reflect prevailing market rates.

How DeFi Protocols and Token Issuers Can Use The CDY Index

The CDY Index can also be utilized by DeFi protocols to set competitive parameters. For protocols to compete for TVL market share, they must offer attractive risk-adjusted yields. This is a difficult task because changing incentive parameters can be a time-consuming process that not only requires deep numerical analysis but also enough community support to pass a vote. 

Without a tool like the CDY Index, the analysis is challenging because protocols must constantly monitor market yields and assess if offering competing yields will, at best, have the intended effect of enhancing engagement or, at worst, harm the protocol and users in an unintuitive way (this can be uncovered by advanced simulations). That said, some protocols have recently outpaced others in growth by offering competitive incentives. Below are two protocols that offer USDC at different supply yields. To remain objective, we anonymize the protocols and round the actual figures in our analysis. Protocol A is a large leader in DeFi lending and offers a ~10% supply rate for USDC. Protocol B, by contrast, is a smaller but growing protocol that offers a ~15% supply rate for USDC. 

As of the end of Q4 2024.

Assuming this pace continues (which admittedly is difficult to forecast for such a dynamic market), the supplied USDC TVL of Protocol B, a nascent protocol, could catch up to Protocol A’s USDC TVL in about 4 quarters. What’s more impressive is that Protocol B has managed to offer higher supply yields while simultaneously maintaining more liquidity compared to Protocol A, indicating a remarkably capital-efficient parameterization of the protocol. For projects to remain competitive, they need a tool to actively monitor market conditions, which is difficult because the market is highly fragmented (see the table of different protocol yields in the previous section). With the CDY Index, DeFi protocols can track market representative rates for major stablecoins and set parameters that optimize both growth and risk. 

The CDY Index’s utility also extends to token issuers. Given that higher yields lead to higher TVL share gains for protocols, we also see that higher yields for stablecoins can lead to higher adoption gains compared to other stablecoins. In Q4 2024, USDC’s market cap grew from $35.6 billion to $43.9 billion, a 23.3% increase, with an average lending supply yield of 8.37% over the quarter. By contrast, a smaller stablecoin (which we anonymize) that saw supply yields ranging between 1%-2.5% in Q4 saw virtually no growth in adoption during that period. By enabling DeFi protocols to set competitive parameters for stablecoins, the CDY Index not only can attract more users to those protocols but can also help enhance the adoption of such stablecoins.