According to Toe Bautista, a research analyst for GSR, the repercussions of historically stringent cryptocurrency oversight are well-documented, but the ensuing sea change is perhaps not fully appreciated. With pro-crypto legislators likely to replace the current regulatory regime, we anticipate a more favorable environment for crypto applications.
Decentralized finance (DeFi), in particular, is well-positioned to reap these benefits. From opening the door for traditional finance (TradFi) to partake in DeFi, to enabling fee switches and U.S. user access to protocols, it’s hard to overstate the impacts for DeFi and stablecoins that can come with regulatory clarity.
With DeFi TVL up 31% and the stablecoin market cap up 4% since the election, it’s clear that users share this sentiment. The coexistence of off-chain and on-chain capital thus far has mainly involved using on-chain capital to capture off-chain yield (e.g., Tether purchasing billions of dollars in U.S. treasuries). With regulatory clarity, we are now in the early stages of off-chain capital moving on-chain.
Post-election developments, like BlackRock and Franklin Templeton expanding their tokenized money funds to new chains, exemplify the substantial capital ready to enter DeFi and are likely just the tip of the iceberg. And beyond tokenization, Stripe recently acquired stablecoin startup Bridge, McDonald’s partnered with NFT project Doodles, and PayPal is using Ethereum and Solana to settle contracts.
This streamlines asset management, enhances market efficiency and liquidity, improves financial inclusion, and ultimately accelerates economic growth. Regulatory clarity will add an accelerant to this already-burgeoning activity.
Similarly, DeFi projects like Ethena and Blur are starting to adapt to the evolving environment as they anticipate improvements in regulatory clarity. A frequent criticism of altcoins is their lack of inherent utility. Addressing this, Ethena approved a proposal to allocate a portion of protocol revenue ($132 million annualized) to sENA holders, bridging the gap between revenue generation and token holders.
Once executed, the proposal could increase participation and investment in Ethena by directly rewarding token holders, thus setting a potential precedent for revenue sharing in DeFi. This move might also encourage other protocols to consider similar mechanisms, enhancing the appeal of holding DeFi tokens.
Institutional interest in crypto has never been higher, with bitcoin ETF AUM inflows on track to surpass the gold ETFs’ AUM within a year. Finance and tech companies exploring the technology and offering crypto products, and corporates adding digital assets to their balance sheets, are all indicators of the growing interest in the space.
Predictions:
- DeFi TVL will continue to grow, potentially exceeding 50% in the next 6 months.
- Stablecoin market cap will increase, potentially reaching $200 billion by the end of 2025.
- Institutional investment in DeFi will increase, with more traditional finance companies entering the space.
- Regulatory clarity will lead to increased innovation and development in DeFi, with more projects launching and existing ones expanding their offerings.
Overall, the article suggests that DeFi is on the brink of a new growth phase, potentially expanding beyond its crypto-native user base to interact more directly with broader financial systems. The DeFi renaissance is here, and it’s likely to have a significant impact on the financial industry as a whole.
