DeFi-ying the Fed? Monetary Policy Transmission to Stablecoin Deposit Rates
Working Paper Series no. 1069. Does the Federal Reserve’s monetary policy influence the rates on USD-pegged stablecoins? While major stablecoin issuers do not pay interest, investors can earn returns by depositing stablecoins in Decentralized Finance (DeFi) protocols. We document unusually large and persistent spreads between traditional short-term interest rates and DeFi deposit rates, as well as a weak and unstable transmission of policy rate changes. We show that, in the short run, monetary policy shocks can move DeFi deposit rates in the opposite direction of policy rates, delaying a convergence that occurs only over the medium run. Both the sign of the short-run effect and the speed of convergence depend on the intensity of deleveraging induced by crypto price reactions relative to the standard interest-rate arbitrage channel -an effect shaped by investors’ limited ability to bridge traditional and decentralized finance.
DeFi Interest Rates and US Short-Term Rates
Source: Aavescan, Bloomberg. Last observation: 30 January 2026.
Non-Technical Summary
While stablecoin issuers do not directly remunerate token holders, investors can deposit stablecoins in Decentralised Finance (DeFi) lending protocols to earn an interest rate analogous to a repo rate in traditional finance. This paper explores the Fed’s monetary policy transmission to these deposit rates.
In this paper, we first establish four motivating stylised facts. First, DeFi interest rates exhibit unusually large and persistent disconnects from traditional risk-free rates: over 2021-2026, the average spread relative to the Federal funds rate has been approximately 100 bps, but with high volatility, and prolonged periods with DeFi rates materially below policy rates (as illustrated in Figure 1). Second, around monetary policy rate changes, DeFi interest rates sometimes go in the opposite direction to policy rate. Third, this pattern seems to be related to the response of Bitcoin returns, and more generally, DeFi rates and Bitcoin returns appear correlated. Fourth, DeFi rates nevertheless converge to risk-free rates in the long run, as confirmed by cointegration tests and error-correction models.
We then develop a simple model of DeFi lending that can account for these stylized facts and rationalize why stablecoin rates may react in both directions around a monetary policy rate change. Two main mechanisms are at play: first, depositors having access to both traditional finance and DeFi arbitrage the difference in interest rates, subject to a series of frictions; second, borrowers adjust their leverage funded in DeFi to size up or deleverage their position in risky crypto assets, like Bitcoin.
To test the predictions of the model, we exploit data available on-chain from Aave, the largest DeFi lending protocol. Relying on a Bayesian Proxy-VAR approach, we find that around monetary policy surprises, the leverage channel has considerably delayed the convergence of DeFi interest rates, depending on the initial response of Bitcoin prices to the shock and on the investor base ability to access traditional finance. To explain the large and persistent spread between risk-free and DeFi interest rates, we investigate the underlying sources in the microstructure of DeFi lending platforms. Using high-frequency and granular blockchain data, we confirm DeFi market functioning is, at this stage, impaired by frictions and by the limited presence of large, active arbitrageurs able to bridge traditional finance and DeFi.
Keywords: Stablecoin, Crypto-assets, DeFi, Monetary Policy Transmission
Codes JEL: G14, G23, G29
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Updated on the 9th of November 2026