The growing popularity of cryptocurrencies has helped fuel interest in decentralized finance, or DeFi, a financial system designed to operate without traditional intermediaries such as banks. However, new research from Penn State suggests that decentralized and traditional financial markets may be more closely connected than they appear.

Siddharth Bhambhwani, assistant clinical professor of accounting at Penn State’s Smeal College of Business, compared borrowing and deposit rates from Aave, a major DeFi cryptocurrency lending platform, with U.S. Treasury yields between January 2023 and March 2026. His analysis found that Treasury yields significantly influence cryptocurrency lending rates, even though there is no direct structural link between the two markets. The findings were published in Finance Research Letters.

DeFi allows users to borrow and lend digital assets without going through conventional financial institutions. Transactions are managed by computer programs known as smart contracts operating on blockchains. Users can deposit digital assets into pools to earn interest, while others borrow from those pools and pay interest. Borrowers generally must provide cryptocurrency worth more than the amount borrowed as collateral.

DeFi can appeal to users because of its accessibility. Protocols generally do not assess credit scores, income or employment history. Users who have sufficient digital assets and meet collateral requirements can transact automatically. DeFi markets also operate around the clock and are accessible from many parts of the world. Depositors may be attracted by yields on stablecoins, cryptocurrencies designed to maintain a stable value, usually relative to the U.S. dollar.

These advantages are accompanied by significant risks. Smart contracts may contain vulnerabilities that can be exploited, users generally do not have deposit insurance, and recovering money after a hack or platform failure can be difficult. Unlike banks, which determine savings rates using factors such as market conditions, competition and funding needs, DeFi protocols typically set rates mechanically according to the utilization of their asset pools.

Despite this structure, Bhambhwani found a systematic relationship between Treasury yields and stablecoin DeFi rates. When Treasury yields rise, stablecoin borrowing and deposit rates tend to increase as well. His analysis found that a quarter-percentage-point movement in the U.S. 10-year Treasury yield was associated with approximately a one-percentage-point movement in stablecoin borrowing rates.

The relationship may reflect investors’ ability to move capital between competing opportunities. Because stablecoins are generally tied to the U.S. dollar, investors can compare returns from depositing stablecoins with those available from Treasury securities. When Treasury yields change, investors may reallocate capital, altering DeFi pool utilization and consequently DeFi interest rates. The same relationship was not found for volatile cryptocurrencies such as Bitcoin and Ethereum, whose large price movements can outweigh relatively small changes in Treasury yields.

The 10-year Treasury yield is particularly significant because it is a widely followed benchmark reflecting broader expectations about economic growth, inflation and monetary policy. Bhambhwani’s findings suggest that stablecoin markets respond to some of the same financial conditions influencing traditional markets. Rather than functioning as completely separate systems, traditional finance and DeFi may therefore increasingly operate as interconnected parts of a broader market for capital.

More information: Siddharth Bhambhwani, DeFi interest rates and treasury yields, Finance Research Letters. DOI: 10.1016/j.frl.2026.110678

Journal information: Finance Research Letters Provided by Penn State