DeFi Yields Attracting Attention Amid Fed Rate Cuts

Investing.com – With the Federal Reserve preparing to cut interest rates, DeFi yields are becoming attractive again, as noted by analysts at Bernstein. They suggest this could serve as a catalyst to rejuvenate crypto credit markets.

The Decentralized Finance (DeFi) system facilitates crypto credit markets, enabling traders to borrow against crypto collateral. According to a note dated Monday from Bernstein analysts, DeFi yields were bolstered by token incentives during the 2020-2021 crypto boom.

For instance, while a basic lending USDC stablecoin yielded 3%, incentives could increase that yield to 15-20%. However, these high returns were unsustainable, and as interest rates rose in 2022-2023, even the yields from USD stablecoins became less appealing compared to US money market yields.

Currently, as the rate cycle turns dovish and a new crypto cycle commences, there is a renewed interest in DeFi markets. “The crypto lending markets are waking up,” analysts stated.

On Aave, Ethereum’s largest lending market, stablecoin lending yields hover between 3.7% and 3.9%. Bernstein projects that if demand for credit among crypto traders increases, DeFi yields could surpass 5%, surpassing money market returns.

Various metrics indicate a recovery in the DeFi market. The total value locked in DeFi protocols stands at about $77 billion—double the low seen in 2022 but still only half of its peak in 2021. Since January 2023, the number of unique monthly DeFi users has tripled or quadrupled, and the circulation of fiat-backed stablecoins has reached a record $158 billion.

“All signs point to a recovering crypto DeFi market that should gain more momentum as rates decline,” the note added.

Bernstein’s strategy reflects this trend, as they have added the Aave token to their digital assets basket, replacing derivatives like GMX and SNX.

“Total outstanding debt on Aave, the largest lending market, has increased threefold from the January 2023 bottom, and the Aave token has risen 23% in the last 30 days,” the analysts noted, despite stable Bitcoin prices.

Bernstein also commented on Ethereum’s weaker performance compared to Bitcoin. “Unlike Bitcoin ETFs that have attracted strong inflows this year, Ethereum ETFs have experienced net outflows during the last seven weeks since launch,” they highlighted.

Nevertheless, analysts anticipate that revitalizing DeFi lending on Ethereum’s mainnet could lure large investors back to crypto credit markets, potentially catalyzing a rebound for Ethereum and enabling it to outperform Bitcoin.

“Unlike Bitcoin, which is a store of value influenced by supply and demand, Ethereum’s growth stems from the utilization of its underlying network, with DeFi markets being a major use case,” Bernstein explained. “It may be time to refocus attention on DeFi and Ethereum.”