A report by Steno Research states that the decentralized finance (DeFi) summer on Ethereum and the crypto market could return as early as 2025. 4 years after the fondly remembered DeFi summer of 2020, the entire value locked (TVL) in protocols can hit an all-time high by early next 12 months.
Nonetheless, the return of DeFi summer rests on two key aspects.
Lower Ethereum Fees Crucial To Attract Investors
Ethereum (ETH) has historically led the DeFi wave, boasting the best TVL locked into its protocols amongst all other smart-contract blockchains. According to DeFiLlama, the TVL locked in Ethereum-based protocols currently stands at roughly $50.11 billion.
Ethereum is followed by Tron (TRX) and Solana (SOL), with a TVL of $8.27 billion and $4.99 billion, respectively. The large difference between TVL locked in Ethereum and all its competitors gives a good idea in regards to the significance of the Ethereum blockchain within the nascent space.
Unsurprisingly, it’s evident that for any meaningful DeFi wave to rise, Ethereum-based protocols should be accessible to all industry enthusiasts, big and small alike. Steno Research posits that lower Ethereum network fees are necessary to make its ecosystem more accessible.
Interest Rate Cuts Could Pave The Way For DeFi Summer
The report by Steno Research posits that the change in U.S. rates of interest will play an important role in determining DeFi’s comeback. Because the emerging market is essentially denominated in USD, a series of rate cuts could increase investor’s risk appetite, leading them to take a position in additional risk-on assets, including digital assets.
Mads Eberhardt, senior cryptocurrency analyst at Steno Research, noted:
Rates of interest are probably the most critical factor influencing the appeal of DeFi, as they determine whether investors are more inclined to search out higher-risk opportunities in decentralized financial markets.
The report adds that the DeFi summer of 2020 was also buoyed by the Federal Reserve’s interest-rate cuts in response to the COVID pandemic. In consequence, the subspace witnessed an all-time high TVL locked into its protocols in 2021, peaking at over $175 billion.
An example of the high-risk-seeking behavior of investors in 2020 is the recognition of passive investment strategies like yield farming.
For the uninitiated, yield farming allows investors to “farm” yield on their tokens by providing liquidity to liquidity pools of decentralized exchanges (DEX), lending platforms, or other applications.
Nonetheless, Vitalik Buterin has expressed concerns in regards to the sustainability of such short-term, high-risk reward strategies. 2024 is quite a bit different.
While no global pandemic is at work, rates of interest have remained high to tackle high inflation, discourage consumer spending, and influence currency value. Nonetheless, with cracks starting to seem within the US jobs market, the Federal Reserve is anticipated to initiate a series of interest-rate cuts from September onwards.
One other factor that would trigger the return of DeFi summer is the expanding stablecoin supply. Recent on-chain data indicates that stablecoin growth has flipped into positive territory, making a bullish case for the crypto industry.
Further, demand for real-world assets (RWAs) within the broader ecosystem has grown substantially within the broader ecosystem, indicating a healthy appetite for on-chain financial products. Examples of such RWAs include tokenized stocks, bonds, and commodities.
While the prospect of one other DeFi summer sounds appealing, investors needs to be wary of the risks related to the protection of their digital assets.
Featured image from Unsplash, Chart from TradingView.com