TO crypto-moves/another-defi-summer-is-on-the-horizon/” rel=”nofollow noopener” target=”_blank”>report Steno Research claims that the summer of decentralized finance (DeFi) on ethereum and the cryptocurrency market could return as early as 2025. Four years after the memorable DeFi summer of 2020, the total value locked (TVL) in protocols may hit an all-time high early next year.
However, the return of DeFi summer is based on two key factors.
Reducing ethereum fees is crucial to attract investors
ethereum (eth) has historically led the DeFi wave, boasting the highest TVL locked in its protocols among all other smart contract blockchains. ethereum” target=”_blank” rel=”noopener nofollow”>According According to DeFiLlama, the TVL locked in ethereum-based protocols currently amounts to approximately $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 on ethereum and all its competitors gives a pretty clear idea of the importance of the ethereum blockchain in this nascent space.
Unsurprisingly, it becomes clear that for a significant wave of DeFi to emerge, ethereum-based protocols must be accessible to all industry enthusiasts, both large and small. Steno Research posits that the ethereum network’s lower fees are important for its ecosystem to become more accessible.
Interest rate cuts could pave the way for DeFi summer
Steno Research’s report posits that the shift in interest rates in the United States will play a crucial role in determining the comeback of DeFi. Since the emerging market is largely denominated in US dollars, a series of rate cuts could increase investors’ risk appetite, leading 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 the DeFi summer of 2020 was also boosted by the Federal Reserve’s interest rate cuts in response to the COVID pandemic. As a result, the subspace witnessed an all-time high TVL locked in its protocols in 2021, peaking at over $175 billion.
An example of investors' high-risk seeking behavior in 2020 is the popularity of passive investment strategies such as yield farming.
For the uninitiated, yield farming allows investors to “farm” the yield on their tokens by providing liquidity to the liquidity pools of decentralized exchanges (DEXs), lending platforms, or other applications.
However, Vitalik Buterin has expressed concerns about the sustainability of these short-term, high-risk reward strategies. The year 2024 is very different.
While this is not a global pandemic, interest rates have been kept high to deal with high inflation, discourage consumer spending and weigh on the value of the currency. However, as cracks begin to appear in the US labor market, the Federal Reserve is expected to begin a series of interest rate cuts starting in September.
Another factor that could trigger the return of DeFi summer is the growing supply of stablecoins. Recent on-chain data indicates that stablecoin growth has moved into positive territory, which makes a bullish argument for the cryptocurrency industry.
Furthermore, demand for real-world assets (RWA) in the broader ecosystem has grown substantially, indicating a healthy appetite for on-chain financial products. Examples of such RWAs include tokenized stocks, bonds, and commodities.
While the prospect of another DeFi summer sounds appealing, investors should be wary of the risks associated with the security of their digital assets.
Featured image from Unsplash, chart from TradingView.com
