Translation: Blockchain in Vernacular
Decentralized finance (DeFi) yields are poised to pick up as expectations for a Federal Reserve rate cut approach, with a 25 or 50 basis point cut likely on Wednesday, according to analysts at research and brokerage firm Bernstein.
“With rate cuts on the horizon, DeFi yields look attractive again. This could be the catalyst to restart crypto credit markets and reignite interest in DeFi and Ethereum,” Gautam Chhugani, Mahika Sapra and Sanskar Chindalia wrote in a client note on Monday.
DeFi enables global participants to earn returns on stablecoins such as USDC and USDT by providing liquidity to decentralized lending markets.
Although the DeFi summer craze of 2020 is now a distant memory, and the high returns generated by additional application token incentives are long gone, Aave, the largest lending market on Ethereum, still offers stablecoin lending returns of 3.7% to 3.9%.
1. DeFi is on the rise again
Analysts pointed out that as the interest rate cycle turns to easing, a new round of crypto cycle is accumulating and the crypto lending market is recovering again.
While the total value locked in DeFi is still only half of its 2021 peak, it has doubled to $77 billion from the 2022 low, and the number of monthly DeFi users has tripled to quadruple since the low.
Total locked value in DeFi. Image credit: Bernstein.
Chhugani, Sapra and Chindalia said that the stablecoin market capitalization has also recovered to a high of about $178 billion, according to The Block’s data dashboard, and the number of monthly active wallets has stabilized at about 30 million. They added that these are "all signs of a recovery in the crypto DeFi market, which is expected to accelerate further as interest rates fall."
If credit demand from crypto traders increases, stablecoin DeFi yields could exceed 5%, surpassing the returns of U.S. dollar money market funds. This would further revive the crypto credit market and drive digital asset prices higher, they said.
2. Betting on Aave and Returning to Ethereum
To reflect this trend, Bernstein added Aave tokens to its digital asset portfolio as an alternative to derivatives protocols GMX and Synthetix. Analysts pointed out that Aave's total outstanding debt has tripled from its low point in January 2023, and despite little or even a slight decline in Bitcoin prices, Aave tokens have risen 23% in the past 30 days. The portfolio also includes BTC, ETH, OP, ARB, POL, LDO, SOL, UNI, LINK and RON.
Ethereum has underperformed relative to Bitcoin as spot ETF inflows have underperformed, with the ratio falling 36% over the past 12 months and falling below the 0.04 mark over the weekend for the first time since April 2021, according to TradingView data.
However, analysts say that a resurgence in the DeFi lending market on Ethereum could attract large whales and institutional investors back into the crypto credit market, providing a turning point for Ether’s lackluster performance relative to Bitcoin. “We believe it may be time to refocus on DeFi and Ethereum,” they added.
Gautam Chhugani holds long positions in a number of cryptocurrencies. In simple terms, he is bullish on the future performance of these cryptocurrencies and has invested in them in the hope that their prices will rise in the future.
