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Bernstein: Renewed interest in DeFi and Ethereum could revive crypto credit market

Published 2024-09-17, 06:38 a/m
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Investing.com – With the Federal Reserve gearing up to cut interest rates, DeFi yields are looking attractive again, according to analysts at Bernstein, who say this could be the catalyst to reboot crypto credit markets.

The Decentralized Finance (DeFi) system helps bootstrap crypto credit markets, where traders can borrow against crypto collateral. In a note dated Monday, Bernstein analysts said DeFi yields were boosted by incentives from application tokens during the 2020-2021 crypto boom.  

"For example, if plain vanilla lending USDC stablecoin offered a 3% yield, the free token incentives would juice the yield to 15-20%," the analysts wrote. However, these high yields were unsustainable, and as interest rates increased in 2022-2023, even standard USD stablecoin yields became less attractive compared to US money market yields.

Now, with the rate cycle turning dovish and a new crypto cycle emerging, there is renewed interest in DeFi markets. "The crypto lending markets are waking up," the analysts said. 

On Aave, the largest lending market on Ethereum, lending yields for stablecoins range from 3.7% to 3.9%. Bernstein estimates that if crypto traders' demand for credit increases, DeFi yields could rise above 5%, beating money market yields.

According to Bernstein, various metrics point to a recovery in the DeFi market. The total value locked in DeFi protocols is now about $77 billion, which is double the 2022 low but still half of its 2021 peak. Since January 2023, the number of unique monthly DeFi users has tripled or quadrupled, and the supply of fiat-backed stablecoins in circulation has hit a new high of $158 billion. 

"All signs point to a recovering crypto DeFi market that should gain more momentum as rates go down," the note added.

Reflecting this trend, Bernstein has added the Aave token to its digital assets basket, replacing derivative protocols like GMX and SNX

"Total outstanding debt on Aave, the largest lending market, is up 3x from the January 2023 bottom, and the Aave token is up 23% in the last 30 days," the note said, even as Bitcoin prices have remained flat or declined.

Bernstein also addressed the relative underperformance of Ethereum compared to Bitcoin. "Unlike strong inflows into Bitcoin ETFs year-to-date, Ethereum ETFs have seen net outflows in the last seven weeks since launch," the broker noted. 

However, the analysts believe that rebuilding DeFi lending markets on the Ethereum mainnet could attract large investors back to the crypto credit markets, sparking a turnaround for Ethereum and helping it outperform Bitcoin.

"Unlike Bitcoin, which is a store of value driven by supply and demand, Ethereum’s growth is led by the usage of its underlying network, with DeFi markets being the largest use case," Bernstein explained. "We believe it may be time to turn back attention to DeFi and Ethereum."

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