A yield curve is a graph that plots the expected returns (yields) of investments across different time periods. In crypto, yield curves appear in DeFi lending markets and fixed-rate protocols.
Traditional Finance
In traditional markets, the yield curve typically shows interest rates on government bonds across maturities (1 month to 30 years). A "normal" curve slopes upward (longer terms = higher yields). An "inverted" curve (short-term yields > long-term) historically signals recession.
Yield Curves in DeFi
DeFi is developing its own yield curves through protocols that offer fixed-rate lending at different durations. Platforms like Pendle separate yield-bearing assets into principal and yield components, creating tradeable yield curves.
Why It Matters
Yield curves help investors understand the relationship between risk, time, and return. In DeFi, comparing yields across different lock-up periods and protocols helps optimize capital allocation. A steep DeFi yield curve might indicate that longer commitments are being well-rewarded, while a flat curve suggests less incentive for locking up funds.