As U.S. Federal Reserve rate cuts loom, analysts at research and brokerage firm Bernstein predict a resurgence in decentralized finance (DeFi) yields, particularly on Ethereum. With a 25- to 50-basis-point cut anticipated, DeFi yields are expected to attract more interest and activity. DeFi platforms offer global participants the opportunity to earn yields on stablecoins by providing liquidity in decentralized lending markets. While the explosive growth of the 2020 “DeFi summer” has faded, stablecoin lending on platforms like Aave continues to offer competitive rates of around 3.7% to 3.9%.
The total value locked (TVL) in DeFi protocols has surged from the lows of 2022 to approximately $77 billion, although still only half of its 2021 peak. The number of monthly active DeFi users has also increased significantly, signaling a gradual reawakening of the market. Stablecoins have seen a resurgence as well, with total issuance returning to around $178 billion and active wallet numbers stabilizing at about 30 million monthly users. These positive trends are expected to continue as rates head down and the market accelerates further.
Jeremy Allaire, CEO of Circle, predicts that stablecoins will account for 10% of the global economy within the next decade. He expresses optimism about the future of cryptocurrency, emphasizing the growing role of stablecoins in global transactions driven by advancements in blockchain technology. Allaire also notes the rapid acceptance of digital assets by many governments, with clear regulations being established for their use. He anticipates that stablecoins will be considered “legal electronic money” in most places by 2025, expanding their share of the $100 trillion electronic money market.
Bernstein has added Aave to its digital assets portfolio, replacing derivative protocols GMX and Synthetix. Aave, a DeFi lending giant, has seen outstanding debt triple from its January 2023 low, while its token price has risen significantly in the past 30 days despite relatively stagnant Bitcoin prices. The analysts also believe that Ethereum’s underperformance relative to Bitcoin may be temporary and could potentially attract large institutional investors and whales back into the crypto credit markets. As the rate cuts approach, the DeFi market’s resurgence may increase yields and play a crucial role in shaping the next phase of the crypto credit market.
While a modest 25-point cut by the U.S. Federal Reserve could favor long-term Bitcoin price appreciation, a more aggressive 50-point cut might signal heightened recession fears, potentially leading investors to reduce their exposure to Bitcoin. This could trigger a significant decline of 15-20%. However, the Federal Reserve is likely to focus on mitigating economic risks rather than market reactions. As the market awaits the outcome of the rate cuts and their impact on both traditional and crypto markets, the resurgence of DeFi yields on platforms like Aave could play a key role in shaping the future of the crypto credit market.
