Bitrabo Editorial
A recent report published by Steno Research suggests the potential return of the decentralized finance (DeFi) summer to the Ethereum blockchain and the broader cryptocurrency market as soon as 2025. This resurgence, reminiscent of the 2020 DeFi summer, could see a surge in the Total Value Locked (TVL) in protocols to an all-time high by early next year.
However, the successful revival of DeFi summer hinges on two critical factors.
Importance of Lower Ethereum Fees in Attracting Investors
Ethereum has historically been at the forefront of the DeFi movement, boasting the highest TVL locked in its protocols compared to other smart-contract blockchains. According to DeFiLlama, the current TVL locked in Ethereum-based protocols sits at around $50.11 billion.
Trailing Ethereum are Tron (TRX) and Solana (SOL) with TVL figures of $8.27 billion and $4.99 billion, respectively, emphasizing Ethereum’s dominance in the space. To catalyze a significant DeFi wave, accessibility to Ethereum-based protocols for all industry participants, regardless of their size, is vital. Steno Research asserts that reducing Ethereum network fees is crucial to enhance the accessibility of its ecosystem.
Role of Interest Rate Cuts in Potentially Fueling DeFi Summer
Steno Research’s report highlights that changes in U.S. interest rates will be instrumental in the resurgence of DeFi. Given that the majority of the market operates in USD, a series of interest rate reductions might heighten investors’ appetite for risk, prompting them to explore riskier assets such as digital assets.
Mads Eberhardt, a senior cryptocurrency analyst at Steno Research, emphasized the significance of interest rates, stating that they sway investors’ willingness to engage in high-risk opportunities within decentralized financial markets.
The report notes that the 2020 DeFi summer was partly fueled by the Federal Reserve’s interest-rate cuts in response to the COVID-19 pandemic, resulting in a record TVL peak exceeding $175 billion in 2021.
Key behavior in 2020 included the adoption of high-risk strategies like yield farming, where investors earned yields by providing liquidity to decentralized exchanges and lending platforms. However, concerns have been raised by figures like Vitalik Buterin regarding the sustainability of such strategies.
In the current landscape of 2024, although global crises are not as prevalent, high interest rates persist to combat inflation and affect economic variables. Yet, with signs of strain in the U.S. labor market, the Federal Reserve is anticipated to commence a succession of interest rate reductions from September onwards.
Moreover, an upsurge in stablecoin supply and a growing demand for real-world assets (RWAs) within the ecosystem signal a positive outlook for the crypto industry. The expansion of on-chain financial products and assets like tokenized stocks, bonds, and commodities points towards a healthy appetite for DeFi offerings.
While the notion of a revived DeFi summer is exciting, investors are advised to remain vigilant regarding the security and preservation of their digital assets amid the evolving landscape.