Investing.com – Analysts at Bernstein say DeFi profitability is looking attractive again as the Federal Reserve prepares to cut interest rates. It could be a catalyst for a cryptocurrency market restart.

Decentralized Finance (DeFi) is helping bootstrap crypto lending markets, where traders can borrow against crypto collateral. In a note Monday, Bernstein analysts said DeFi yields were boosted by the incentives of application tokens during the crypto boom of 2020-2021.

“For example, if a regular USDC lending stablecoin offered a 3% yield, free token incentives would increase the yield to 15-20%,” the analysts wrote. However, these high yields were unsustainable, and with rising interest rates in 2022-2023, even regular USD stablecoin yields have become less attractive compared to U.S. money market yields.

Now, with the interest rate cycle turning dovish and a modern cryptocurrency cycle emerging, interest in DeFi markets is renewing. “Crypto lending markets are waking up,” analysts said.

On Aave, the world’s largest lending marketplace, yields on stablecoin loans are between 3.7% and 3.9%. Bernstein estimates that if demand for loans from cryptocurrency traders increases, DeFi yields could rise above 5%, surpassing money market yields.

According to Bernstein, various indicators point to a recovery in the DeFi market. The total value locked in DeFi protocols now stands at around $77 billion, which is double the low of 2022 but still half of the peak of 2021. Since January 2023, the number of unique monthly DeFi users has tripled or quadrupled, and the supply of fiat-backed stablecoins in circulation has reached a modern high of $158 billion.

“All signs point to a recovery in the DeFi cryptocurrency market, which should gain momentum as interest rates fall,” the note added.

Responding to this trend, Bernstein has added this token to its basket of digital assets, replacing derivative protocols such as and .

“Total borrowing on Aave, the largest lending marketplace, has tripled since its January 2023 low, and the Aave token value has increased by 23% over the past 30 days,” the note reads, even as prices remained flat or fell.

Bernstein also addressed Ethereum’s relative underperformance compared to Bitcoin. “In contrast to the strong inflows into Bitcoin ETFs this year, Ethereum ETFs have seen net outflows over the past seven weeks since launch,” the broker noted.

However, analysts believe that the recovery of the DeFi lending market on the Ethereum mainnet could once again attract gigantic investors to the crypto lending markets, which could support Ethereum improve and support it outperform Bitcoin.

“Unlike Bitcoin, which is a store of value driven by supply and demand, Ethereum’s growth is being driven by the use of its underlying network, with DeFi markets being the largest use case,” Bernstein explained. “We believe it’s time to refocus attention on DeFi and Ethereum.”