The evolution of monetary policy transmission in DeFi market

Abstract

This study investigates how U.S. monetary policy affects decentralized finance (DeFi), focusing on capital flows and interest rate sensitivity across over 500 DeFi pools from 2022 to 2024. Using three models: (1) static TVL regression, (2) rolling DeFi deposit beta, and (3) rolling DeFi interest beta, the analysis captures both cross-sectional and time-varying monetary transmission effects. Model 1 shows that DeFi deposits decline in response to rising interest rates. Model 2 confirms that DeFi deposit betas are weakly negative overall, with stablecoin pools exhibiting stronger sensitivity. Model 3 finds limited responsiveness in DeFi lending rates, suggesting that APYs are primarily driven by internal protocol mechanisms rather than macroeconomic rates. The study further analyzes these effects across pool types and over time to capture heterogeneity in monetary policy transmission. The results indicate that DeFi is partially responsive to monetary policy, mainly through capital reallocation rather than interest rate pass-through. This research extends traditional monetary transmission frameworks to decentralized markets and provides new insights into DeFi’s evolving role in the financial system.