DeFi-TradFi Blurring Lines: “Join the digital asset revolution and ride the wave of financial freedom with a smart investment strategy focused on maximizing yields,” declared our favorite AI tool, apparently having not yet learned from last year’s sudden-stop in the digital carry trade. The demise of Terra Luna was the straw that bent DeFi. Total value locked (TVL) plunged from $165 billion to $80 billion last Spring. Lending rates in the digital ecosystem collapsed. It is quite different from traditional market norms. When risk-free rates are falling sharply, it is usually in a cyclical downturn. Credit spreads are ordinarily widening to compensate for increased default risk. In DeFi, yields are driven entirely by demand, rising as investors hunt for leverage in a strong market and falling when risk is being unwound in a weak one. DeFi not only survived – FTX was a blip – by adapting. With lending yields unattractive and risk tolerance lesser, DeFi is migrating to traditional assets. Take MakerDAO. Real world assets account for 56.8% of Maker revenues today – it was nothing a year ago. Stablecoin is 59.4% of assets but earns almost no money. Maker began testing investments in liquid US Treasury bills and corporate bonds to earn yields. By doing so, it integrates into the regulatory mainstream with Sygnum as a banking partner and Blackrock the portfolio manager. The ability to adapt is key to recovery – TVL in DeFi is back to levels first crossed in March 2021. Rising yields are indicative of stronger demand in the ecosystem, now 3.8% annualized for bitcoin from –2.8% in November on a one-day basis. Perhaps our favorite AI tool is projecting forward.