The decentralized finance space has enjoyed massive growth over the past several years. Investors have happily poured capital into the space to take advantage of yields that were far better than anything seen in traditional finance.
Like most risk assets, crypto performs best when interest rates are low, and capital is plentiful. The historically low traditional interest rates and money printing from the Federal Reserve has benefited crypto in a number of ways.
However, as we head towards 2023, that narrative is changing. We’ll soon see just how sticky DeFi is to investors who now have other acceptable alternatives for generating somewhat safe and stable yields.
With the Federal Reserve enacting a fourth consecutive 0.75% interest rate hike last week, interest rates are at their highest levels since 2008, a time when there was no crypto and no DeFi, and rates are expected to continue rising well into next year.
With traditional lending becoming expensive, capital will be harder to come by. More importantly, with the yield on U.S. Treasuries rising above 4%, investors now have a safe and stable alternative to DeFi for generating solid yields.
(Image via Federal Reserve)
We’ve seen DeFi lending rates moderate as the crypto space becomes more mature and stable. While lower rates aren’t ideal, more stability is welcome in the space. However, these lower rates aren’t as competitive with U.S. Treasuries any longer, and DeFi lending is considered riskier when compared with the safety of U.S. Treasuries.
Fortunately, crypto markets have remained somewhat calm during this rate hike cycle, though we’ve seen a pullback over the past week following the latest Fed rate hike.
While the interest rate paid on bank savings accounts remains pitifully low, rates for major crypto lending players are lower on average than the rates available from Treasuries. Even three-month T-bills are…
