As June comes to a close, the summer season has officially begun, leading cryptocurrency investors to wonder if we will soon be in for another “DeFi summer,” as they have every summer since DeFi first became widely accepted in the cryptocurrency industry in the summer of 2020.
DeFi is an alternative financial system that uses decentralized applications (dApps), smart contracts, and blockchain technology to deliver financial services in an open and transparent manner and without the need for reliable middlemen.
The nascent multi-chain DeFi ecosystem experienced a boom in attention and investment over the summer of 2020.
DeFi Llama claims that over the summer of 2020, the trade value locked (TVL) across all significant smart-contract-enabled blockchains increased by 5 times, from about $2 billion to over $10 billion, before continuing to soar further in 2021.
TVL stands for the currency locked in dApp smart contracts, which is cryptocurrency.
The larger DeFi ecosystem is still in a rut as summer 2023 gets started.
Since the catastrophic collapse of the Ponzi-esque Terra blockchain’s DeFi ecosystem last May, TVL across major chains has remained stalled below $100 billion.
While significant crypto industry catastrophes like the Terra collapse and FTX implosion last November are already in the past, it seems doubtful that this summer will see a recurrence of the excitement we saw towards DeFi in 2020.
Here are two important reasons why “DeFi Summer” Probably Will Not Return in 2023.
The SEC is on the Attack
The aggressive and litigious US Securities and Exchange Commission (SEC) is one of the main uncertainties that the Decentralised Finance sector must deal with.
As part of its efforts to bring the US crypto business into compliance, the SEC has been suing the sector nonstop this year.
However, despite being borderless, DeFi protocols continue to provide services to the general public in the US, putting them at risk of being targeted by the SEC. Many anticipate that DeFi will soon be in the firing line.
These cryptocurrencies’ developing DeFi ecosystems are in jeopardy of being subjected to stricter US restrictions.
Although Ethereum, the main DeFi blockchain, has not yet been formally classified as a security by the organization, SEC Chairman Gary Gensler has already stated that he believes it to be one.
The SEC may potentially attempt to compromise important USD stablecoins like USDT and USDC, which are essential to the DeFi ecosystem.
Investors interested in crypto may prefer US regulation-proof crypto investments like bitcoin, which the SEC has specifically stated it does not recognize as a security, due to the US regulatory uncertainties.
TradFi Yields Are High and Increasing
In contrast to the summer of 2020, investors can easily earn high returns by purchasing traditional finance (TradFi) asset classes like US government bonds in the summer of 2023, and these yields may even continue to climb.
In the wake of lockdowns brought on by the Covid-19 outbreak, central banks all over the world aggressively reduced interest rates to bolster the economy around the beginning of 2020.
Deposit rates at banks and the yields on government bonds fell.
On the other hand, we enter the summer of 2023 after more than a year of aggressive interest rate increases from the world’s three largest central banks, the Fed, BoE, and ECB, who have all been attempting to control the inflation that has been out of control.
Government bond and bank deposit yields are much higher now than they were in 2020, and they may continue to rise as central banks promise further rate increases.
For instance, an investor would earn a 4.7% annual return if they were to purchase US 2-year bonds today and keep them until maturity.
The return on a 2-year yield held to maturity at this point in 2020 was less than 0.2%.
Investors looking for higher return opportunities were a major driver of the 2020 DeFi summer.
There is significantly less incentive to look for DeFi yields now that the TradFi market is offering such alluring risk-free rates.
Future expansion for DeFi anticipated?
Before investing in DeFi, it is critical to understand the sector’s future growth potential. It would appear that there is plenty of room to grow to at least the levels obtained during the previous bull cycle if we look at the chart below showing DeFi’s tremendous climb during the 2021 DeFi Summer.
There is no certainty that the move will be replicated in the crypto markets, but it does imply that there was once a market interest in DeFi at these levels.