With the US Federal Reserve (Fed) cutting interest rates and the possibility of a 25 or 50 basis point cut on Wednesday, DeFi yields are set to return, according to analysts at research and brokerage firm Bernstein.
“With the possibility of a rate cut coming, DeFi yields become attractive. This could be the catalyst to restart the crypto credit market and revive interest in DeFi and Ethereum,” Gautam Chhugani, Mahika Sapra and Sanskar Chindalia wrote in a note to clients on Monday.
DeFi allows global participants to earn yield from stablecoins like USDC and USDT by providing liquidation on decentralized lending markets, among other use cases.
While the DeFi summer craze of 2020 is a distant memory and the yield spikes from that period with additional incentives for application Token are long gone, stablecoin lending yields on AAVE — the largest lending marketplace on Ethereum — still offer between 3.7% and 3.9%.
According to analysts, with the interest rate cycle heading towards a dovish trend and a new crypto cycle forming, the crypto lending market is reawakening.
Total value locked in DeFi , while only half its 2021 peak, has doubled from its 2022 Dip to $77 billion, with the number of monthly DeFi users increasing 3-4x since its low.
Total value locked in DeFi | Source: Bernstein
According to data from The Block, stablecoins have also returned to highs of around $178 billion and monthly active wallets have stabilized at around 30 million, Chhugani, Sapra and Chindalia said. They added that “all of these are signs that the crypto DeFi market is recovering and will continue to accelerate as interest rates decline.”
Source: The Block
If traders’ demand for credit increases, DeFi stablecoin yields could rise above 5%, surpassing what US dollar money market funds offer. That would further fuel the crypto credit market and fuel digital asset prices, they said.
Reflecting this trend, Bernstein is adding the AAVE Token to its digital asset portfolio to replace Derivative protocols GMX and Synthetix. Total outstanding debt on AAVE has tripled from its January 2023 Dip , and the AAVE Token is up 23% over the past 30 days, despite Bitcoin's flat or falling price. The basket also includes BTC, ETH, OP, ARB, POL, LDO, SOL, UNI, LINK, and RON.
ETH has struggled against Bitcoin amid poor spot ETF flows and the ratio is down 36% over the past 12 months, falling below 0.04 over the weekend for the first time since April 2021, according to TradingView .
However, analysts say the strengthening of the DeFi lending market on Ethereum could attract large whales and institutional investors back into the crypto credit market, creating a catalyst to counter ETH ’s poor performance against Bitcoin. They added:
“We believe it may be time to turn our attention back to DeFi and Ethereum.”
Gautam Chhugani maintains Longing positions in various cryptocurrencies.
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Minh Anh
According to The Block
