We discuss how Pro-crypto legislation could allow DeFi to potentially connect with mainstream financial systems.
Originally seen in CoinDesk’s Crypto Long and Short
The repercussions of historically stringent crypto 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. DeFi, in particular, is well-positioned to reap these benefits. From opening the door for 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.
Historically, institutions have hesitated to move onchain due to regulatory risks. However, with Bitcoin ETF AUM inflows on track to surpass the gold ETF AUM within a year, finance and tech companies exploring the technology and offering crypto products, and corporates adding digital assets to their balance sheets, institutional interest in crypto has never been higher. That said, the coexistence of off-chain and onchain capital thus far has mainly involved using onchain 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 onchain. 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 and administration enhances market efficiency and liquidity, improves financial inclusion, and ultimately accelerates economic growth. Regulatory clarity will add accelerant to 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, 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. In addition, protocols may also enable US users to access front-ends and partake in airdrops, compared to the current default of restricting US users. At the same time, development and innovation should flourish, with founders more confident about the reduced risks of building in the US. By expanding token utility to benefit from protocol success, enabling access to fair and free onchain services often without rent-seeking intermediaries, and removing barriers to innovation that have made this country so great, we may be on the brink of a new era for DeFi development and usage.
Collectively, these factors indicate that DeFi may be 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.
Author:
Toe Bautista, Research Analyst | Twitter, Telegram, LinkedIn
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