A subtle shift is occurring in decentralized finance (DeFi).
While the previous DeFi bull market was fueled by high—though questionable—yields and speculation, the current expansion is driven by the sector’s integration as a foundational financial layer for user-facing apps and increased institutional involvement.
The total value locked (TVL) in leading DeFi lending protocols, including Aave, Euler, Spark, and Morpho, has surpassed $50 billion and is nearing $60 billion, marking a 60% increase over the past year. This surge is attributable to swift institutional adoption and more sophisticated risk management tools.
“These are evolving beyond simple yield platforms; they are transforming into modular financial networks experiencing rapid institutionalization,” the authors remarked.
The ‘DeFi mullet’
A key trend highlighted is the embedding of DeFi infrastructure within user-facing applications to provide yield or loans, a concept referred to as the “DeFi mullet”: fintech front-end, DeFi backend.
For example, users can borrow against their Bitcoin holdings powered by Morpho’s backend. This integration has already facilitated over $300 million in loans.
Bitget Wallet’s collaboration with Aave provides a 5% yield on USDC and USDT across various chains without needing to leave the crypto wallet app. Similar initiatives are seen with PayPal’s PYUSD stablecoin, offering yields close to 3.7% to users.
Crypto-friendly fintech firms like Robinhood or Revolut may adopt similar strategies, offering services such as stablecoin credit lines and asset-backed loans via DeFi markets to establish new fee-based revenue streams.
Tokenized RWAs in DeFi
DeFi protocols are increasingly exploring tokenized versions of traditional assets like U.S. Treasuries and credit funds, referred to as real-world assets (RWAs).
These tokenized assets can act as collateral, earn yield straight away, or be incorporated into more complex strategies.
Read more about the tokenized Apollo Credit Fund’s DeFi debut with a levered-yield strategy.
Tokenization of investment strategies is also gaining traction. Pendle, a protocol allowing users to split yield streams from principal, now manages over $4 billion in total value locked, mainly from tokenized stablecoin yield products.
Meanwhile, Ethena’s sUSDe and similar yield-bearing tokens have introduced products yielding over 8% using strategies like cash-and-carry trades, all while minimizing the operational burden for users.
Rise of on-chain asset managers
An essential but less visible trend is the emergence of crypto-native asset managers. Firms like Gauntlet, Re7, and Steakhouse Financial allocate capital across DeFi ecosystems using professionally managed strategies, mirroring traditional asset managers’ roles.
These firms are deeply involved in DeFi protocol governance, refining risk parameters and deploying capital across structured yield products, tokenized real-world assets (RWAs), and modular lending markets.
The report mentions that the sector’s capital under management has quadrupled since January, rising from $1 billion to over $4 billion.
Read more about crypto for advisors, focusing on DeFi yields and their revival.
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