The possibility of declining interest rates, coupled with increased investment in Bitcoin, might just be the catalyst needed to reboot the decentralized finance (DEFI) market.
Risky asset or safe haven?
As interest rates decrease, the resulting dip in U.S. Treasury yields is likely to push investors toward riskier but higher-yielding opportunities.
This shift places Bitcoin in the spotlight, often viewed as a risk-on asset. Historically, lower interest rates have led investors to seek out more volatile asset classes, including cryptocurrencies.
Of course, this isn’t always the case. ARK Invest CEO Cathie Wood, speaking at the Hong Kong Web3 Festival earlier this year, mentioned that Bitcoin could eventually serve as a risk-off asset, particularly during times of currency devaluations in emerging markets.
DeFi is back?
The summer of 2021 marked a memorable period for decentralized finance, reminiscent of the 2017 ICO boom.
During this time, basic DeFi infrastructure emerged, particularly on Ethereum, with total value locked (TVL) soaring by around 2,100% from approximately $700 million to $15 billion.
Today the DeFi sector is increasingly pivoting towards Bitcoin. With interest rates expected to decline, investors may be drawn to the higher yields offered by Bitcoin’s expanding network and its growing layer-2 ecosystems.
This shift suggests that Bitcoin could be the driving force behind the next DeFi boom.
There’s a growing buzz around the evolving “BTCFi” movement, which differs from the traditional view of Bitcoin as merely an inflation hedge.
Beyond the positive momentum from ETF approvals earlier this year, Bitcoin’s DeFi ecosystem is flourishing.
This growth has been fueled by the introduction of Ordinals and Runes, as well as a surge in yield-bearing protocols on EVM-compatible scaling solutions.
They carry unacceptable risks for many, as almost all services are third party, so users must giving up their keys, thus, the real ownership of their Bitcoin. But the yield is tempting.
What is innovation?
Bitcoin’s increasing utility and interoperability are further evidenced by the influx of funds into projects like for example Babylon and others.
This trend reflects a big shift within the DeFi space, moving away from pure speculation toward a focus on community, utility, and innovation.
While speculative traders, often referred to as “degens,” may still seek to capitalize on market fluctuations, the DeFi space is becoming more relevant and accessible to the broader market.
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