Crypto Long & Short: Where DeFi yield really comes from (and why it broke this spring)

Hi readers,

Welcome to our institutional newsletter, Crypto Long & Short. This week:

• Most people who lost money in DeFi this spring weren't hacked, writes David Plisek of Solstice Finance — they were holding a yield that finally stopped working
• Top headlines institutions should pay attention to by Francisco Rodrigues
• “Crypto-collateralized lending declines in line with the broader market” in Chart of the Week

Thanks for joining us!

- Kim Klemballa

Where DeFi yield really comes from and why it broke this spring

by David Plisek, chief operating officer, Solstice Finance

Most people who lost money in DeFi this spring didn’t lose it because someone hacked a smart contract. They lost it because a story they’d been sold about yield finally stopped working.

The numbers were hard to ignore. In April, the Kelp DAO bridge was drained for $292 million. Within 48 hours, DeFi had lost $13 billion in total value locked (TVL). Aave alone lost $8.45 billion. Two weeks before that, Drift on Solana got hit for $285 million.

Most of the coverage treated these as contagion events, which they were. But contagion describes how losses spread, not why some positions were exposed, and others weren’t. That question has a more useful answer, and it starts with how the industry talks about yield: as a product, something you market, package and sell like a phone plan, then stack against your competitor's number and let users sort by size. That framing makes yield easy to compare. It also strips out almost everything that determines whether a given yield holds up.

On any exchange interface, yield arrives as a figure on a list: 8%, 24%, whatever the next protocol needs to advertise. The figure is usually accurate and close to uninformative. Behind it sits a system: where capital is deployed, how risk is priced, what happens at redemption, who holds custody, which regulatory perimeter applies and what the underlying assets are. The annual percentage yield is that system’s output. Read that alone, and it tells you the system was functioning at the moment the number was generated, and nothing about how it behaves under stress.

Kelp's rsETH shows how far a headline figure can drift from what's underneath it. It was sold as a yield-bearing liquid staking token. Still, structurally it was a token with 20 bridge dependencies and a single-verifier configuration that needed multiple human operators to remain uncompromised, backed by assumptions most of its users had no way to read. The oracle kept valuing it at par long enough for the attacker to borrow $190 million against fabricated supply before Aave could freeze the market. The failure was architectural, several layers below the number holders were pricing off.