A report According to Steno Research, the summer of decentralized finance (DeFi) on Ethereum and the cryptocurrency market could return as early as 2025. Four years after the fondly remembered DeFi summer of 2020, the total value locked (TVL) in protocols could reach an all-time high by early next year.
However, the return of DeFi summer is based on two key factors.
Ethereum Fee Reduction Key to Attracting Investors
Ethereum (ETH) has consistently led the DeFi wave, boasting the highest TVL locked in its protocols among all other smart contract blockchains. According to DeFiLlama, the TVL locked in Ethereum-based protocols currently stands at around $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 huge difference between the TVL locked in Ethereum and all its competitors gives a good idea of the importance of the Ethereum blockchain in the nascent space.
Unsurprisingly, it is evident that for a significant DeFi wave to grow, Ethereum-based protocols must be accessible to all industry enthusiasts, big and small. Steno Research believes that lower Ethereum network fees are important to make its ecosystem more accessible.
Falling Interest Rates Could Usher in DeFi Summer
Steno Research’s report argues that the evolution of US interest rates will play a crucial role in the return of DeFi. Given that the emerging market is largely denominated in USD, a series of rate cuts could increase investors’ risk appetite, encouraging them to invest in riskier assets, including digital assets.
Mads Eberhardt, senior cryptocurrency analyst at Steno Research, noted:
Interest rates are the most critical factor influencing the attractiveness of DeFi, as they determine whether investors are more inclined to seek higher-risk opportunities in decentralized financial markets.
The report adds that DeFi’s summer of 2020 was also driven by the Federal Reserve’s interest rate cuts in response to the COVID pandemic. As a result, the subspace saw a record level of TVL locked in its protocols in 2021, peaking at over $175 billion.
An example of high-risk investor behavior in 2020 is the popularity of passive investment strategies like yield farming.
For the uninitiated, yield farming allows investors to “farm” the yield of their tokens by providing liquidity to liquidity pools of decentralized exchanges (DEXs), lending platforms, or other applications.
However, Vitalik Buterin expressed concerns about the sustainability of such short-term, high-risk reward strategies. 2024 is very different.
Although there is no global pandemic at work, interest rates have remained high to combat inflation, discourage consumer spending, and influence the value of the currency. However, as cracks begin to appear in the U.S. labor market, the Federal Reserve is expected to launch a series of interest rate cuts starting in September.
Another factor that could trigger the return of DeFi summer is the increase in stablecoin supply. Recent on-chain data indicates that stablecoin growth has moved into positive territory, making a bullish case for the crypto industry.
Additionally, demand for real-world assets (RWA) in the broader ecosystem has increased significantly, indicating a healthy appetite for on-chain financial products. Examples of such RWAs include tokenized stocks, bonds, and commodities.
While the prospect of a new DeFi summer seems appealing, investors should be wary of the risks associated with the security of their digital assets.
Featured image from Unsplash, chart from TradingView.com
