Renewed Interest in DeFi and Ethereum Could Revive Crypto Credit Market

Investing.com – As the Federal Reserve prepares to cut interest rates, analysts at Bernstein suggest that the renewed appeal of DeFi yields could serve as a catalyst for revitalizing crypto credit markets.

Decentralized Finance (DeFi) enables the establishment of crypto credit markets where traders can borrow against crypto collateral. In a recent note, Bernstein analysts highlighted that during the 2020-2021 crypto boom, DeFi yields surged due to incentives from application tokens.

For instance, they observed that while a standard USDC stablecoin might offer a 3% yield, the inclusion of free token incentives could elevate that yield to as high as 15-20%. However, these inflated yields were ultimately unsustainable, and as interest rates climbed throughout 2022-2023, even basic USD stablecoin yields became less attractive compared to US money market yields.

Now, with interest rates trending downwards and a new cycle in cryptocurrency beginning, there is a resurgence of interest in DeFi markets. The analysts noted, “The crypto lending markets are waking up.”

In Aave, the largest lending platform, stablecoin lending yields currently hover between 3.7% and 3.9%. Bernstein speculates that if demand for crypto credit from traders increases, DeFi yields could surpass 5%, potentially outperforming money market yields.

Several indicators point to a recovery in the DeFi market, as highlighted by Bernstein. The total value locked in DeFi protocols has reached approximately $77 billion, which is double the low seen in 2022, yet still half of the peak in 2021. Since January 2023, the number of unique monthly DeFi users has increased significantly, and the supply of fiat-backed stablecoins has climbed to a new high of $158 billion.

“All signs indicate a recovering crypto DeFi market that is likely to gain more momentum as interest rates decline,” the analysts stated.

In light of this trend, Bernstein has included a new token in its digital assets portfolio, replacing previous derivatives.

The note mentioned that total outstanding debt on Aave has surged threefold since the January 2023 low, and the Aave token has risen 23% over the past month, even as other prices have remained stable or decreased.

Bernstein also discussed the relative performance of Ethereum versus Bitcoin. The analysts observed that while Bitcoin ETFs have attracted strong inflows this year, Ethereum ETFs have experienced net outflows in the past seven weeks since their launch.

However, Bernstein believes that revitalizing DeFi lending markets on the Ethereum mainnet could entice significant investors back into the crypto credit arena, potentially leading to a recovery for Ethereum and allowing it to surpass Bitcoin in performance.

The analysts explained, “Unlike Bitcoin, which relies on supply and demand as a store of value, Ethereum’s growth is driven by the utilization of its underlying network, with DeFi markets representing its largest application. We believe it may be time to refocus on DeFi and Ethereum.”