A Yield-Risk Assessment of Aave, Compound & Spark

1. Why a high APY isn’t automatically a good investment

Lending stablecoins for interest is often seen as the conservative entry into DeFi. Platforms like Aave, Compound, or Spark.fi advertise attractive returns – often far above what traditional banks or government bonds offer.

But the impression is misleading: Unlike traditional finance, DeFi doesn’t promise rates, creditworthiness checks, or benchmark curves. The APY emerges dynamically – driven by supply, demand, protocol parameters, and incentive systems. That makes proper evaluation more complex.

In traditional portfolios, analyzing return in relation to risk is standard. In DeFi, it’s often just the number that matters, while the drivers behind it remain obscure. A high APY might indicate stress, illiquidity, or aggressive behavior – making it a warning sign rather than a promise.

This article shows how to perform a structured risk assessment for lending strategies. Our goal: a stable, predictable yield – outperforming traditional instruments, but grounded in a clear risk structure.

We’ll compare three real-world platforms, evaluate historical trends, analyze indicators, and derive concrete actions. Not as a theoretical model – but as a practical decision aid for anyone allocating capital in DeFi.

2. Investment Objective and Context

Before we assess risks, we need a goal. In this case, it’s clear:

Goal:
A stable, predictable yield on stablecoins that outperforms current government bond yields.

In traditional finance, this would be called “seeking risk-adjusted excess return over the risk-free rate.” In practice:

If 10-year U.S. Treasury bonds yield 4.5%, then our DeFi lending strategies should outperform that threshold – ideally with low volatility and no significant capital loss.

But unlike sovereign bonds, DeFi platforms don’t guarantee repayment. Instead, they compete for liquidity with different mechanisms, user bases, and technical foundations.

Our context:
We consider three candidates for stablecoin allocation:

1. Aave (v3)
   Well-established, high liquidity, conservative parameters. APY moves steadily but reacts to demand shocks.

2. Compound (v3)
   Responds quickly to market changes, shows spikes – both up and down.

3. Spark.fi
   A newer protocol backed by MakerDAO. Offers the highest current yield, but has less liquidity and limited historical data.

We’re not hunting the highest return – we want the best risk-adjusted return, measured by stability, predictability, and robustness.

3. How We Compare Lending Platforms

In traditional investing, you’d evaluate fixed-term deposits or bonds based on interest rates, maturity, default risk, and liquidity. In DeFi, the principles are similar – but subtler. Rates are variable, liquidity can vanish in seconds, and instead of ratings you get... GitHub repos.

To bring structure, we use our Web3 Open Risk Framework. It helps capture risks, link them to clear indicators, and support smart decisions. For this case – yield with substance – we use three metrics:

1. Lending APY Trend
The historical yield trend shows how stable or erratic earnings are.
→ Stable yields imply demand and predictability; spikes may suggest speculation.

2. Utilization Ratio
This tells us how much of the protocol’s liquidity is currently lent out.
→ A high ratio may mean higher yields – but also early signs of liquidity stress.

3. Relative TVL
Total Value Locked helps compare platform maturity and resilience.
→ Low TVL with high APY? Tempting, but often a red flag.

These indicators aren’t magic – but they bring clarity. That’s the point of the framework:
Making risks visible and comparable without needing to read 100 pages of whitepaper or blindly trusting APY numbers.

4. Three Platforms, Three Risk Profiles

Imagine you're a portfolio manager at a small crypto investment firm. Your task: allocate some stablecoin exposure to lending protocols for consistent returns above traditional money market products – but without nasty surprises.

We review three platforms: Aave, Compound, and Spark. All offer similar assets, but behave very differently. Here are our (fictional) benchmark stats for USDC:

What does this tell us?

• Aave is like a well-rated bond – low volatility, reliable performance.
• Compound resembles a money market fund on steroids – good returns, but with heat risk.
• Spark is the bold newcomer: high APY, but unproven resilience.

Mini-Assessment

Based on our framework, the risk profile looks like this:

This isn’t a final verdict, but a starting point. And that’s the key difference:

APY alone isn’t truth – context is.

5. Three Platforms, Three Personalities – But Where to Put Your Capital?

If you want to earn yield in DeFi, you’ll soon face the choice: Aave? Compound? Or Spark, the shiny new yield machine? On the surface, they offer the same thing – interest for stablecoins. But under the hood, they behave very differently.

That’s where our risk framework comes in. Instead of being dazzled by numbers, we ask a few simple but crucial questions:

• Is the yield stable or just a short-term spike?
• What’s the liquidity like – can I exit easily?
• Is there enough protocol maturity to absorb stress?

Aave – The dependable workhorse
Aave is the backbone of our stablecoin portfolio. The yield is modest, slightly declining – but stable. The utilization ratio sits at a healthy 48%, indicating strong liquidity and low stress. Perfect for the core portfolio.

Compound – The twitchy high-yielder
Compound grabs attention with a +4.2% MoM rate increase. Sounds good, right? But utilization is at a worrying 94% – like boarding an overcrowded train. We’re keeping an eye on Compound, but not allocating new capital for now.

Spark – The risky yield magnet
Spark is new, flashy – and pays the most. That’s the problem. The APY is far above market level, but with low historical volume and high liquidity pressure. It’s not a bonus – it’s a risk premium. We use Spark for a small test position only, under close monitoring.

6. Conclusion: Don’t Just Look at Yield – Understand the Story Behind It

A reliable yield portfolio needs more than good numbers. It needs context, comparability – and a healthy dose of skepticism. That’s why we built the Web3 Open Risk Framework. It forces structured thinking, instead of blind trust.

And the best part: it works with pen and paper. No tools, no dashboards – just a critical mindset and the right questions.