The U.S. Federal Reserve is expected to make rate cuts soon, and analysts at Bernstein believe that this will have a positive impact on decentralized finance (DeFi) yields. The analysts predict that a rate cut could reboot crypto credit markets and revive interest in DeFi, particularly on the Ethereum platform. Stablecoin lending on platforms like Aave continues to offer competitive rates, and the total value locked in DeFi protocols has doubled to approximately $77 billion since its lows in 2022. Stablecoins have also seen a resurgence, with total issuance returning to around $178 billion, and active wallet numbers stabilizing at around 30 million monthly users.
Jeremy Allaire, CEO of Circle, predicts that stablecoins will play a significant role in the global economy, potentially accounting for 10% within the next decade. He is optimistic about the future of cryptocurrency and believes that stablecoins will be considered legal electronic money in most places by 2025. If demand for crypto credit rises, DeFi stablecoin yields could surpass 5%, outpacing yields from U.S. dollar money market funds. This increase could reignite crypto credit markets and provide upward momentum for digital asset prices.
In light of the improving outlook for the DeFi 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 low in January 2023, and its token price has increased by 23% 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 attribute it to weaker spot exchange-traded fund flows. Strengthening DeFi lending on Ethereum could attract large institutional investors and whales back into the crypto credit markets.
As the rate cuts approach, the resurgence of the DeFi market may increase yields and play a key role in shaping the next phase of the crypto credit market. However, there are warnings that an aggressive interest rate cut by the U.S. Federal Reserve could signal deeper economic concerns and negatively affect risk assets like Bitcoin. While a modest 25 basis point cut could favor long-term Bitcoin price appreciation, a more aggressive 50 basis point cut might indicate heightened recession fears, leading investors to reduce their exposure to Bitcoin and potentially triggering a decline of 15-20%. The Federal Reserve is expected to focus on mitigating economic risks rather than market reactions.
