Decentralized finance (DeFi) lending has become a premier smart contract use case, with ~$30B in total value locked across hundreds of DeFi lending protocols as of January 2024. As DeFi becomes more robust and increased activity results in more attractive yields, traditional financial institutions are beginning to evaluate onchain investment opportunities. However, in order to do so effectively, they will need a clear and reliable window into the opportunities presented by the DeFi ecosystem.
This product research report explores the need for a Chainlink DeFi Yield Index (CDY Index)—a new in-development data product that uses industry-standard Chainlink oracles to aggregate market-wide DeFi lending rates. Designed with a focus on accuracy, robustness, and market representativeness, the CDY Index would enhance the discoverability of onchain lending opportunities, improving capital efficiency and liquidity.
The Necessity of a DeFi Yield Index
DeFi protocols heavily rely on the pricing information of assets: If a user wants to borrow or lend assets, the protocol must first accurately determine the value of the debt and collateral. Chainlink Price Feeds play a critical role in DeFi lending as protocols rely on accurate prices to value collateral, liquidate loans, calculate interest rates, and manage risk and capital efficiency.
The intense focus on data quality and oracle infrastructure security has led Chainlink Price Feeds to become the most time-tested and widely used price oracle solution across the DeFi economy, making it the clear market leader across DeFi protocols. Nearly all major lending protocols, including Aave and Compound, use Chainlink Price Feeds to support their functionality.
While traditional finance has established indexes that reflect macroeconomic activity, DeFi has yet to create such aggregated data sources. DeFi does not have a definitive base rate directly analogous to the federal funds rate in traditional markets, as one rate in DeFi does not unilaterally impact all other rates. In addition, it’s difficult to aggregate DeFi yields as protocols constantly evolve and the categories of protocols are diverse, making strategies that offer yield (and the determining factors of these yields) vary widely.
Constructing a DeFi yield index requires knowledge of what drives rates on protocols and expertise in accurately aggregating rates in a way that is representative of the lending market. With a proven history of security and reliability in any market and network environment, Chainlink is substantially qualified to construct an aggregate market-wide DeFi lending yield index because the Chainlink platform is deeply embedded in DeFi, and Chainlink’s decentralized data aggregation methodologies have proven to be accurate and robust.
The Chainlink DeFi Yield Index (CDY Index)
The Chainlink DeFi Yield Index will be designed to aggregate DeFi lending yields using industry-standard Chainlink price oracles. By promoting the discoverability of onchain yield opportunities on lending protocols, the CDY Index is intended to enhance capital efficiency in DeFi lending.
The Chainlink DeFi Yield Index will be able to offer enhanced opportunities for a variety of market participants:
- Capital allocators can discover yield opportunities they had previously not considered. The CDY Index will give traditional financial institutions a window into DeFi and help them evaluate new ways to earn yield, manage risk, and deploy capital more efficiently.
- Lending protocols can benefit from increased inflows facilitated by the CDY Index. More assets available for lending leads to higher fee revenue for the protocols, which can be used to enhance protocol features, security measures, and overall user experience.
- Users can benefit from higher liquidity as new inflows lead to deeper liquidity pools, reducing slippage and providing users with better access to loans or the ability to exit positions more efficiently. These benefits can attract more borrowers, leading to higher protocol revenues and potentially higher yields for liquidity providers.
Chainlink DeFi Yield Indexes will initially be calculated for the largest, most liquid crypto markets, including:
- Wrapped BTC (WBTC)
- Wrapped ETH (WETH)
Below is an example of the CDY Index calculated for USDC lending rates, with the gray lines representing the lending rates for USDC on individual lending protocols and the blue line representing the Chainlink DeFi Yield Index for USDC.
If you’d like to read more about the methodology behind the CDY Index calculation, read the full report.
Reach Out to Our Team
The CDY Index represents a pivotal point in DeFi lending, offering financial institutions and DeFi market participants access to an index that tracks and aggregates lending yields across DeFi markets in a robust and accurate manner—underpinned by Chainlink’s time-tested, credibly neutral infrastructure.
To find out how your organization can benefit from the Chainlink DeFi Yield Index, reach out to our team.