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A report by Steno Research states that the decentralized finance (DeFi) summer on Ethereum and the crypto market could return as early as 2025. Four years after the fondly remembered DeFi summer of 2020, the total value locked (TVL) in protocols can hit an all-time high by early next year.
However, the return of DeFi summer rests on two key factors.
Lower Ethereum Fees Crucial To Attract Investors
Ethereum (ETH) has historically led the DeFi wave, boasting the highest TVL locked into its protocols among all other smart-contract blockchains. According to DeFiLlama, the TVL locked in Ethereum-based protocols currently stands at 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 enormous difference between TVL locked in Ethereum and all its competitors gives a fair idea about the significance of the Ethereum blockchain in the nascent space.
Unsurprisingly, it’s evident that for any meaningful DeFi wave to rise, Ethereum-based protocols must be accessible to all industry enthusiasts, big and small alike. Steno Research posits that lower Ethereum network fees are important to make its ecosystem more accessible.
Interest Rate Cuts Could Pave The Way For DeFi Summer
The report by Steno Research posits that the change in U.S. interest rates will play a crucial role in determining DeFi’s comeback. Since the emerging market is largely denominated in USD, a series of rate cuts could increase investor’s risk appetite, leading them to invest in more risk-on assets, including digital assets.
Mads Eberhardt, senior cryptocurrency analyst at Steno Research, noted:
Interest rates are the most critical factor influencing the appeal of DeFi, as they determine whether investors are more inclined to seek out higher-risk opportunities in decentralized financial markets.
The report adds that the DeFi summer of 2020 was also buoyed 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 into its protocols in 2021, peaking at over $175 billion.
DeFi TVL is well under its 2021 peak on the weekly chart | Source: TOTALDEFIUSDT on TradingView.com
An example of the high-risk-seeking behavior of investors in 2020 is the popularity of passive investment strategies like yield farming.
For the uninitiated, yield farming allows investors to “farm” yield on their tokens by providing liquidity to liquidity pools of decentralized exchanges (DEX), lending platforms, or other applications.
However, Vitalik Buterin has expressed concerns about the sustainability of such short-term, high-risk reward strategies. 2024 is a lot different.
While no global pandemic is at work, interest rates have remained high to tackle high inflation, discourage consumer spending, and influence currency value. However, with cracks starting to appear in the US jobs market, the Federal Reserve is expected to initiate a series of interest-rate cuts from September onwards.
Another factor that could trigger the return of DeFi summer is the expanding stablecoin supply. Recent on-chain data indicates that stablecoin growth has flipped into positive territory, making a bullish case for the crypto industry.
Further, demand for real-world assets (RWAs) in the broader ecosystem has grown substantially in the broader ecosystem, 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 safety of their digital assets.
Featured image from Unsplash, Chart from TradingView.com
