Bernstein says DeFi yields are set for a comeback amid likely US rate cuts

With U.S. Federal Reserve rate cuts on the horizon and the potential for a 25 or 50 basis point cut on Wednesday, decentralized finance yields are set for a comeback, according to analysts at research and brokerage firm Bernstein.

“With a rate cut likely around the corner, DeFi yields look attractive again. This could be the catalyst to reboot crypto credit markets and revive interest in DeFi and Ethereum,” Gautam Chhugani, Mahika Sapra and Sanskar Chindalia wrote in a note to clients on Monday.

DeFi enables global participants to earn yield on stablecoins like USDC and USDT by providing liquidity on decentralized lending markets, among other use cases.

While the craze of 2020’s DeFi summer is a distant memory and the juiced-up yields from that era with additional app token incentives are long gone, stablecoin lending yield on Aave AAVE -4.30% — the largest lending market on Ethereum — still offers between 3.7% to 3.9%.

DeFi on the rise again

With the rate cycle headed dovish, and a new crypto cycle building up, crypto lending markets are waking up again, according to the analysts.

Total value locked in DeFi, though still at half its 2021 peak, has doubled from the 2022 bottom to $77 billion, with monthly DeFi users up three to four times since the lows, they noted.

Total value locked in DeFi. Image: Bernstein.

Stablecoins are also back at highs of around $178 billion, according to The Block’s data dashboard, and monthly active wallets are stable at around 30 million, Chhugani, Sapra and Chindalia said. These are “all signs of a recovering crypto DeFi market that should see further acceleration as rates head down,” they added.

If the credit appetite of crypto traders rises, stablecoin DeFi yields could rise above 5%, beating those on offer by U.S. dollar money market funds. That would further reignite crypto credit markets and add fuel to digital assets prices, they said.

Betting on Aave and turning attention back to Ethereum

To reflect this trend, Bernstein is adding the Aave token to its digital assets portfolio to replace derivative protocols GMX and Synthetix. Total outstanding debt on Aave is up three times from its January 2023 bottom and the Aave token is up 23% over the last 30 days, despite flattish to down bitcoin prices, the analysts noted in their reasoning. The basket also includes BTC, ETH, OP, ARB, POL, LDO, SOL, UNI, LINK and RON.

Ether has struggled relative to bitcoin amid poorer spot exchange-traded fund flows and a ratio down 36% in the past 12 months, dropping below 0.04 over the weekend for the first time since April 2021, according to TradingView .

However, strengthening DeFi lending markets on Ethereum could bring large whales and institutional investors back to the crypto credit markets, providing a catalyst to stem ether’s underperformance relative to bitcoin, the analysts said. “We believe it may be time to turn back attention to DeFi and Ethereum,” they added.

Gautam Chhugani maintains long positions in various cryptocurrencies.