DeFi Comeback: Interest Rates and Stablecoins Fuel Crypto Market Surge

Decentralized finance (DeFi) is making a strong comeback, with the total value locked (TVL) in the crypto market expected to reach a new high by next year, according to a recent report by Steno Research.

Interest rates play a crucial role in DeFi’s attractiveness, especially since the market is largely centered around the U.S. dollar. Steno analyst Mads Eberhardt 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 highlighted that the first DeFi boom in 2020 coincided with the Federal Reserve’s interest rate cuts in response to the Covid pandemic.

However, interest rates aren’t the only factor fueling DeFi’s resurgence. The market is also benefiting from crypto-specific trends. One such trend is the growth of the stablecoin supply, which has increased by around $40 billion since January. Steno emphasized the importance of stablecoins, calling them the “backbone of DeFi protocols.” As interest rates decline, the opportunity cost of holding stablecoins drops, making them more appealing—similar to how the broader DeFi market becomes more attractive in a lower interest rate environment.

The expansion of real-world assets (RWAs), like tokenized stocks, bonds, and commodities, also contributes to DeFi’s growth. The 50% increase in these assets this year shows strong demand for on-chain financial products. Additionally, lower fees on the Ethereum network, the primary blockchain for DeFi, make decentralized finance more accessible, according to the report.

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