TL;DR

A never-ending list of tariffs is announced. The market crashes, altcoins get obliterated.

Your pristine low-risk farms yielding 30% are down to near T-bill levels.

This can’t be. You were planning your retirement off the $300k you have, farming $90k a year. The yield must flow.

So you start going down the risk curve, chasing your imaginary yield level, as if the market cares about you.

You switch your blue-chip stables for obscure new projects; you compound risk by, in turn, deploying this riskier asset into a novel fixed-maturity protocol or AMM. You smirk to yourself. The spice keeps flowing.

Some weeks go by, and you start questioning why you were so risk-averse in the first place. This is clearly a safe and reliable way to make money.

And then, surprise.

The custodial, leveraged, L2 wrapped hyperliquid basis-trade project to which you trusted your life savings messed up, and now your PT-shitUSD-27AUG2025 took a 70% haircut. You get some vested governance tokens to make up for your loss, and the project gets abandoned a few months later.

This story, while hyperbolic, reflects a reality I’ve seen many times over as yields compress in bear market conditions.

In a previous article, “How to Get Wealthy With Market Neutral Investing in DeFi,” I covered why I believe market neutral is a good investment long-term. Go read it to cover the basic ways to analyze risks. Here, I’ll try to provide a manual on how to survive the yield bear market.

People struggle to adapt to new realities and, faced with a market crash, will crank up risks to make up the difference while ignoring the potential costs of these decisions.

Market-neutral investors are also speculators, and their edge depends on finding dis-adjusted rates. Unlike our directional trading brethren, we deal with mostly binary outcomes: you either win a little every day or you lose big all at once.

In my opinion crypto market-neutral rates become hugely dis-adjusted on the way up, providing a lot of alpha over their true risk, but work the opposite way on the way down, providing sub–risk-free rate (RFR) returns while having a whole lot of risk.

Clearly, there are times to risk-on, and times to risk-off. People who fail to see this become Thanksgiving’s dinner.

To take an example, at the time of writing, AAVE yields 2.7% for USDC and sUSDS 4.5%.

• AAVE USDC pays 60% of RFR while holding smart contract, oracle, custody and financial risk.

https://app.aave.com/reserve-overview/?underlyingAsset=0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48&marketName=proto_mainnet_v3

• Maker pays 25 basis points above RFR while holding smart contract, custody risk, and active investment in riskier projects.

https://app.spark.fi/

When analyzing rates in DeFi market neutral investment you need to take into consideration:

-custody risk

-financial risk

-Smart contract risk

-Risk free rate

You can allocate an annual percentage risk on each of these risks, add RFR and what results is your very own ‘risk-adjusted return’ needed for each investment opportunity. Everything above that rate is alpha, every thing below is inverse alpha.

A while back, I calculated Maker’s needed returns to adjust to its risk and arrived at 9.56% as fair compensation.

SKY savings rate is DeFi’s reference rate. Is it alpha, or just beta exposure? Let’s see: SSR pays 6.5% on $USDS, 2.25% more than the Fed’s RFR. To achieve this higher rate, depositors underwrite three key risks: custody, smart contract, and financial risk. Custody risk: Maker deposits capital across multiple venues: $1.5B in TradFi (BlockTower) $1B in Spark $612M in Spark Liquidity Layer $600M in Morpho (loaned against USDe) $150M in AAVE

(https://info.sky.money/collateral/spark, https://makerburn.com/#/rundown)

An optimistic assumption is that custody/execution risk can be priced at 3% annually, comparable to institutional custody cost/insurance. Smart contract risk:

@NexusMutual offers open-market insurance for SKY at 0.96%. https://v2.nexusmutual.io/cover/product/45 Financial risk: Maker holds ~50% of TVL in T-bills, with $2.3B in active investments. If we benchmark this against AAVE’s 4.69% risk pricing (https://v2.nexusmutual.io/cover/product/97), the system’s risk premium for this 28% slice of TVL is 1.31%. Additionally, Maker’s $115M in first-loss capital covers up to 1.4% of the system capital, lowering risk. I’ll be ignoring the risk offset by junior capital because i’m also simplifying risks (assuming USDC and off-chain T-bills bear 0 risk, and treating all other investments as AAVE-risk equivalent) So with that in mind: what’s the implied fair rate for SKY? RFR + custody risk + smart contract risk + financial risk = risk-adjusted return 4.25% + 3% + 0.96% + 1.31% = 9.56% Some of you will think the 2.25% risk premium is fair compensation, i’m happy to hear your thoughts.

Any rate above the risk-free rate is either alpha, beta, or straight-up work. Given enough time, beta will blow up. In every investment, you always have both alpha and beta; they exist in a commingled state. You’ll always have to underwrite a certain amount of beta to access alpha, and that’s perfectly fine. The tricky thing about market-neutral investing is knowing how to differentiate the two, while keeping your emotions, especially your greed, in check. Higher rates will always be there, but are they risk-adjusted? Am I being fairly compensated for the risk I’m taking?

Maker’s rate currently stands at 4.5%.

Both AAVE and Maker hold junior capital (~1% of total deposits), but even with substantial insurance, yielding below RFR should not be acceptable for depositors.

In a time of Blackroll T-bills and regulated on-chain issuers, this is the result of inertia, lost keys, and dumb money.

So what to do? Depends on your size.

If you have a smaller portfolio (<$5m), there are still attractive risk-adjusted options. Check safer protocols in all of their chain deployments; they usually have incentives on some obscure chain with low TVL, or do some basis trade on a high-yielding, low-liquidity perp.

If you are big money (>$20m):

Buy T-bills and sit tight. Favorable market conditions will return eventually. You can also search for OTC deals; projects are still going around searching for TVL and willing to dilute their holders heavily in your favor.

If you have LPs, let them know about this, even offer them to withdraw. On-chain T-bills are still subpar to the real deal (assuming you have a working legal structure). Don’t get carried away by dis-adjusted risk. Good opportunities become obvious. Keep it simple and avoid greed. You should be in here for the long run and properly manage your risk; if not, the market will take care of it for you.

The #1 rule of market neutral?

Don’t. Get. Rekt.

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