A potential economic recession raises the question of whether Yearn’s stablecoin vault products could see increased demand. In downturns, investors often shift toward capital preservation and lower-risk, yield-bearing instruments. Yearn’s vaults – which aggregate yield on stablecoins like USDC/DAI – might attract attention if they can offer superior returns with managed risk. This internal report examines five key assumptions about investor behavior and technical feasibility in a recessionary scenario. We analyze historical data on recessions, compare DeFi yields to traditional yields, review user experience innovations (account abstraction), and evaluate fiat on-ramp integrations. The goal is to determine if a recession could present a strategic opportunity to grow Yearn’s stablecoin vault user base, and what conditions or improvements would be necessary to capitalize on it. The analysis is neutral and evidence-driven, intended to inform Yearn contributors in strategic planning.
Assumption 1: In a recession, investors demand more lower-risk, yield-bearing investments. Historical evidence strongly supports this. During economic contractions, risk aversion spikes and investors reallocate from equities and other volatile assets into “safe havens” that preserve capital (Investment Portfolio Strategy in a Recession) (Investment Portfolio Strategy in a Recession). These safe havens typically include government bonds, money market funds, and gold – assets less reliant on economic growth. For example, analysis of past U.S. recessions shows that U.S. Treasury bonds and investment-grade bonds have historically outperformed riskier assets during downturns (Investment Portfolio Strategy in a Recession). This reflects a “flight to quality” as people seek security and modest yields over higher-risk returns.
Concrete capital flow data from previous episodes illustrate this behavior. In early 2025, when recession fears mounted due to global trade tensions, global money market funds (a proxy for low-risk, liquid investments) attracted $30.3 billion of inflows in a single week (Global money market inflows surge as trade tariffs stoke slowdown fears | Reuters). At the same time, equity funds saw almost no new money or even net outflows as investors grew cautious. Similarly, bond funds – valued for stability – pulled in net inflows ($4.3 billion in that week) (Global money market inflows surge as trade tariffs stoke slowdown fears | Reuters). This pattern mirrors what was observed in past recessions: in times of economic stress, capital flows into cash-like instruments and government debt surge. Investors essentially park funds in safer vehicles that still earn some return, even if that return is lower than in boom times.
Another notable safe-haven behavior is increased demand for U.S. dollars and Treasuries during global downturns. As one market commentary noted, heightened demand for U.S. Treasury bonds in downturns boosts the U.S. dollar’s value because Treasuries are seen as one of the safest assets (Investing during a recession: Key takeaways and possible opportunities). This was evident in the 2008 crisis and the 2020 COVID shock: investors worldwide bought U.S. government debt and other low-risk securities, driving yields down (prices up) and strengthening safe-haven currencies. Overall, the historical data validates Assumption 1 – recessions do prompt a significant shift into lower-risk, yield-bearing investments. Yearn’s stablecoin vaults, which aim to provide yield with minimized volatility, align with this “flight to safety but earn yield” motive. The strategic implication is that a recessionary environment could increase baseline demand for products like Yearn vaults if they are perceived as low-risk and reliable. Emphasizing risk management, transparency, and capital preservation in Yearn’s messaging (“yield with safety”) would be critical to capture this demand.
Assumption 2: Yields on traditional low-risk investments fall during recessions. History shows that economic recessions coincide with declining interest rates and yields on instruments like savings accounts, government bonds, and money market funds. There are both policy-driven and market-driven reasons for this. On the policy side, central banks respond to recessions with aggressive monetary easing – cutting benchmark interest rates to stimulate borrowing and growth. For example, in the 2008–2009 Great Recession, the U.S. Federal Reserve slashed the federal funds rate from about 5% in 2007 to near 0% by the end of 2008, and kept it at essentially zero for years after (What Happens to Interest Rates During a Recession?). Similarly, in the 2020 COVID-induced recession, the Fed quickly cut rates back down to 0%. These actions lead to ultra-low yields on safe short-term instruments, since banks and money market funds follow suit. As Investopedia succinctly notes, absent a severe credit crunch, “interest rates fall in a recession because the downturn suppresses loan demand while increasing the supply of savings” (What Happens to Interest Rates During a Recession?). In other words, with businesses reluctant to borrow and consumers saving more defensively, the price of money (interest) drops.
Figure: U.S. Federal Funds Effective Rate with Recessions (shaded). In each recession, interest rates were sharply lowered, driving down yields on safe assets. (What Happens to Interest Rates During a Recession?)
Market dynamics also push down yields on longer-term safe assets during recessions. As noted, investors pile into government bonds as a safe haven, which drives bond prices up and yields down to unusually low levels. For instance, 10-year U.S. Treasury yields often hit cyclical lows during recessions (as seen in 2009 and 2020). This environment means traditional “low-risk” products – savings accounts, CDs, Treasuries, investment-grade bonds – offer meager returns during the recession and immediate recovery period. A historical pattern is that central banks maintain very low policy rates well into the recovery (the U.S., EU, and Japan kept short-term rates near zero for years post-2008) (What Happens to Interest Rates During a Recession?). Consequently, an investor seeking safety in a recession faces near-zero yield in bank deposits or government debt.
One nuance: the current macro backdrop (as of 2024–2025) has featured rising interest rates to fight inflation, so if a recession hits from a high-rate environment, yields may initially be higher than in past downturns. Eventually, however, policy would likely pivot to rate cuts. The key takeaway is that Assumption 2 holds true in typical recessions – safe asset yields are depressed. For Yearn’s strategy, this matters because a low-yield traditional environment increases the appeal of any alternative that can offer even slightly higher stable yields. If Yearn vaults can maintain, for example, a 3–5% APY on stablecoins while banks are paying near 0%, yield-seeking investors might overcome inertia to try the vaults. The next section looks at how DeFi vault yields have historically compared to traditional yields.
Building on the above, we conduct a yield spread benchmarking between Yearn/DeFi stablecoin vaults and traditional low-risk assets. In past low-rate environments, the yield differential has indeed been large. During 2020–2021 (a period of recession and then recovery with extremely low interest rates), DeFi protocols commonly offered deposit yields ranging from 5% up to 20% APY, while traditional banks offered around 0.1% on savings (Core Innovation Capital). This enormous spread was a direct result of yield farming incentives and demand for stablecoin liquidity in DeFi, versus central bank rate cuts that made fiat savings almost free money. A venture analysis in 2021 highlighted that in a world of near-zero yields, DeFi’s rates were “relatively gigantic”, though not risk-free (Core Innovation Capital). For example, Yearn’s own vaults at the tail end of DeFi Summer 2020 had annualized returns in the high single digits (yDAI vault ~9% APY as of Sept 2020) (For example, a user can deposit DAI into the Earn yDAI pool. Yearn …) – orders of magnitude above a bank account at the time.
This yield advantage has been a core value proposition for stablecoin vaults: they transform crypto market demand (and reward tokens) into a return for liquidity providers, which can far exceed traditional fixed-income yields, especially when the latter are suppressed in recessions. During the COVID recession, stablecoin market cap and DeFi total value locked (TVL) surged, indicating many investors were indeed willing to allocate funds to these higher-yield alternatives once traditional yields collapsed. The supply of USD-backed stablecoins surpassed $100 billion by mid-2021 (Core Innovation Capital), in part because holding stablecoins in DeFi protocols was one of the few ways to earn meaningful yield when banks were at 0%.
However, it’s important to note that the yield differential can change over time. In late 2023 and early 2024, as global interest rates rose, the gap narrowed. By early 2025, yields on Yearn-style stablecoin vaults had actually compressed below yields on some traditional instruments – a reversal of the earlier situation. For instance, the USD stablecoin lending benchmark (vaults.fyi index) fell under 3.1% APY, which was lower than the ~4.3% yield on a 1-month U.S. Treasury bill at that time (Innovation Amid Yield Compression: DeFi Lending Markets in Q1 2025). This compression was due to various factors (fewer DeFi borrowing opportunities, more capital chasing DeFi yield, etc.), and it shows that DeFi yields are not inherently always higher; they respond to supply/demand. Still, in a recession scenario, one would expect central banks to cut rates again, likely restoring a favorable spread for DeFi stablecoin yields. Even in the recent high-rate context, major stablecoin vaults continued to see growth in deposits – quadrupling in size over 12 months – suggesting that many investors view DeFi yields as an attractive supplement or alternative to low-risk traditional yields, up to a certain risk tolerance (Innovation Amid Yield Compression: DeFi Lending Markets in Q1 2025) (Innovation Amid Yield Compression: DeFi Lending Markets in Q1 2025).
Assumption 3: Investors will explore alternative assets like stablecoin vaults if the yield spread is significant. The evidence indicates this is valid. There is a demonstrated pattern of yield-seeking behavior where both retail and even some institutional players move into higher-yielding alternatives when conventional yields become unappealingly low. A UN policy brief observed that a “search for yield” in the low-interest environment of the late 2010s and 2020–21 drove many investors into crypto asset markets (). DeFi’s rapid growth in that period can be partially attributed to this phenomenon. In practical terms, if a stablecoin vault can offer (for example) 5% and a money market fund offers 1%, yield-sensitive investors (especially sophisticated retail or crypto-savvy individuals) are willing to allocate to the vault, despite it being an “alternative” asset. They do weigh the extra risks (smart contract risk, etc.), but a large enough yield premium – on the order of several percentage points – has historically spurred significant inflows into DeFi.
For Yearn’s strategy in a recession: maintaining a noticeable yield pickup versus traditional savings will be key. It’s not necessary to promise double-digit APYs (which are likely unsustainable long-term), but even a stable 3–5% when banks are at 0–1% could attract interest. Yearn should gather data from any past periods of TradFi stress to see spikes in vault deposits. Additionally, communicating risk-adjusted returns clearly (e.g., comparing net yield after fees, highlighting insurance or safety measures) will help convince yield-hungry but risk-averse investors to take the leap into stablecoin vaults. The assumption that investors will try new things for better yield holds true, provided the offering is understandable and the yield gap is significant. The next sections address how to make the onboarding and usage of such vaults approachable to those not already deep in crypto.