Decentralized finance (DeFi) is on the way to making an unforeseen comeback by riding the waves of the recent cryptocurrency market surge. Experts suggest that long awaited pump revitalizes the market grappling with past challenges and shifts in traditional market dynamics. However, the recent surge was led by Bitcoin (BTC) as it regained the crucial $35k price level.
Crypto rally sparks DeFi resurgence
As per reports, Interest rates for borrowing stablecoins like Circle’s USD (USDC) and Tether’s USD (USDT) have skyrocketed beyond 10% on Aave, the flagship lender in the DeFi landscape. This ongoing surge signals a renewed interest in leveraging crypto bets. It seems like a departure from the subdued rates during DeFi’s recent struggles against traditional bond market yields
The revival in DeFi’s lending demand aligns with positive funding rates in the perpetual futures market which has played in favor of crypto derivatives contracts. Recent Coinglass data indicates a positive shift in the open interest-weighted funding rate, especially for trending tokens like XRP. Experts suggest that positive funding rates reflect speculators paying to maintain bullish positions, with XRP soaring 11% to $0.72.6 on Monday. However, altcoins like Dogecoin (DOGE) and Shiba Inu (SHIB) are joined by similar movements.
Bloomberg reported that Tarun Chitra, Gauntlet’s co-founder highlighted a connection between the wealth effects and increased lending demand. He added that crypto’s rallies trigger heightened lending demand, coupled with substantial short-side lending from significant holders. This reflexive relationship implicates the surge in leverage demand for longer-term speculative bets as prices surge.
Bitcoin’s rally and extended influence
Bitcoin’s 28% October rally backed and fueled by SEC expectations for Bitcoin ETF approval. The ongoing short-term bull rally has extended its influence to smaller tokens, including Solana (SOL) and Cardano (ADA). The upheavals in centralized lenders, like BlockFi have positioned the DeFi market as a primary platform for leveraged trades. However, the rising borrowing rates in DeFi combined with perpetual futures funding rate increase moves ahead to create arbitrage possibilities for traders navigating divergences between the two.
The resurgence of lending and leverage in DeFi marks a broader shift in investor sentiment amid increased market volatility. As investors return to leverage amidst rising interest rates, DeFi’s pivotal role in the crypto financial ecosystem is reaffirmed. However, market participants remain vigilant, acknowledging potential risks while navigating the evolving dynamics of the crypto market.