As the U.S. Federal Reserve prepares for possible rate cuts, analysts at Bernstein believe that decentralized finance (DeFi) yields are poised for a resurgence. With a rate cut of 25 to 50 basis points expected, analysts forecast a promising outlook for DeFi, particularly on the Ethereum platform. DeFi platforms allow users to earn a yield on stablecoins like USDC and USDT by providing liquidity in decentralized lending markets. Despite the decline in explosive growth seen during the 2020 “DeFi summer,” stablecoin lending on platforms like Aave continues to offer competitive rates of around 3.7% to 3.9%.
According to Bernstein’s analysis, the total value locked (TVL) in DeFi protocols has surged from its lows in 2022 to approximately $77 billion, although still only half of its 2021 peak. The number of monthly active users has also increased three to four times since the market’s lowest point. Stablecoins have also experienced a resurgence, with total issuance returning to around $178 billion and active wallet numbers stabilizing at about 30 million monthly users. These signs indicate a recovering DeFi market that could see further growth as interest rates decline.
Jeremy Allaire, CEO of Circle, predicts that stablecoins will account for 10% of the global economy within the next decade, driven by advancements in blockchain technology and increased integration into financial systems. He expressed optimism about the future of cryptocurrency and stablecoins, noting their growing role in global transactions and services. He anticipates that stablecoins will be considered “legal electronic money” in most places by 2025, further expanding their share of the electronic money market.
In light of the improving outlook for DeFi, 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, and its token price has risen 23% in the past 30 days despite relatively stagnant Bitcoin prices. The analysts also believe that Ethereum’s underperformance against Bitcoin may be temporary, attributing it to weaker spot exchange-traded fund (ETF) flows. They suggest that strengthening DeFi lending on Ethereum could attract institutional investors back to the crypto credit markets.
As the rate cuts approach, the resurgence of the DeFi market may lead to increased yields and play a crucial role in shaping the next phase of the crypto credit market. However, there are concerns that an aggressive interest rate cut by the U.S. Federal Reserve could indicate deeper economic issues, negatively impacting risk assets like Bitcoin. While a modest 25 basis point cut may favor long-term Bitcoin price appreciation, a more aggressive 50 basis point cut could signal heightened recession fears and lead investors to reduce their exposure to Bitcoin, potentially triggering a decline of 15-20%. The Federal Reserve’s focus will likely be on mitigating economic risks rather than market reactions.
