The interest rate you can earn from DeFi is higher than a bank for a variety of reasons. The most common being access to capital by borrowers, smaller margins and overheads, and finally no insurance or regulatory protection.
Borrowers in DeFi and crypto in general are willing to pay more interest for access to capital as much of the traditional finance system doesn’t lend to crypto institutions. Therefore with less access to capital and a growing crypto industry, the interest rates that borrowers are willing to pay to lenders is higher than in traditional finance.
The next reason and most important is smaller margins. While your savings earn near 0% at a bank, banks are lending to borrowers at 3% for mortgages and near 10% for other loans. This is due to the enormous physical and digital infrastructure required to run a traditional financial institution. While banks have large buildings, multiple branches and tens of thousands of employees – DeFi is able to streamline all of that with smart contracts that allow us to lend to each other in an open, permissionless and trustless way. The margin between what you save and borrow at in DeFi is typically 1% or lower.