Bitcoin’s correction may just be getting started. In fact, the crypto sector as a whole could be facing a severe downtrend reminiscent of 2022.

“I could see us going back to a five handle by the end of the year,” Quinn Thompson, founder of crypto hedge fund Lekker Capital, told CoinDesk in an interview. A «five handle,» i.e. a price between $50,000 and $59,999, would be down substantially from the already shaky current $83,000 level and roughly a 50% decline from bitcoin’s peak just above $109,000 just more than two months ago.

“I don’t think it happens quickly, which is why it would be very painful and shocking to people because nothing about the current market conditions is very volatile, with big liquidations and crashes,” Thompson added. “It’s this sort of different market environment, a slow grind down that is almost more unbearable for people because they’re like, ‘Is it over? Is the bottom in?’”

Thompson, who had been bearish from far higher levels, has repeatedly called the White House’s crypto announcements — be it the Sovereign Wealth Fund or Strategic Bitcoin Reserve, or anything in-between — «nothingburgers» and “sell the news” events. He has also argued that Strategy’s (MSTR) constant bitcoin buys aren’t necessarily bullish for the cryptocurrency, since they seem to be the only significant bid.

The economy’s four headwinds

Central to Thompson’s thesis is the idea that the Trump administration’s various policies will likely hurt the economy for the next six to nine months.

First, the Department of Government Efficiency (D.O.G.E), in its efforts to reduce the U.S. deficit, is bent on cutting government spending — which has been one of the largest drivers of job growth in recent years. The labour market was already wobbly when the Biden team handed over the reins to Trump, Thompson said, and the new government’s fiscal arm isn’t interested in propping things up anymore.

“People get caught up in the politics of it,” Thompson said. “We can disagree on whether we need the Department of Education or not. But those dollars were being printed and going into people’s pockets, and those people spent them, and went on vacation and to the grocery store. So it was growth positive.”

Elon Musk, the main force behind D.O.G.E, said last week that he was aiming to cut $1 trillion in government spending by the end of May; he also said he wanted to cut 15% of the government’s annual spending, meaning almost $7 trillion.

Even if D.O.G.E fails its stated objective and only manages to cut, say, a hundred billion over the course of four years, the bigger cuts are likely to occur at the beginning of Trump’s term, not the end, Thompson argued. This means that D.O.G.E’s impact on the economy and consumer sentiment is likely to be felt in the coming months, no matter whether the agency actually succeeds or not.

Second, the crackdown on illegal immigration at the southern border — combined with the renewed emphasis on deportations — is bound to affect the labour market, Thompson said. Migration is growth positive because it puts pressure on wages; if that labour pool dries up, workers will demand higher salaries, which some businesses won’t be able to afford.

Thompson’s third issue is tariffs. The Trump administration keeps changing up its tariff threats on a day-to-day basis, sometimes promising new ones, sometimes calling them off, creating doubt as to whether the majority of proposed tariffs will actually ever go into effect. But the important thing about tariffs is that they create uncertainty for businesses, which may elect to delay investment or hiring decisions until the tariff situation is resolved.

Finally, the Federal Reserve doesn’t seem to be in a hurry to loosen financial conditions because inflation data hasn’t been great. The U.S. central bank cut interest by a full percentage point at the end of 2024, to 4.25%-4.5%, and even that wasn’t enough to push bitcoin above $110,000. Thompson says he expects the Fed to cut anywhere between 25 and 75 basis points in 2025, but that these cuts will be spread out in the second half of the year.

“I think there’s a lot more coordination going on between the Treasury and the Fed than people want to believe,” Thompson said. “People thought Trump and [Fed chair] Powell would be bickering, but they’re actually kind of on the same team right now. [Secretary of Treasury] Bessent and Trump are bringing growth down, and that helps Powell achieve lower inflation.”

When will the bottom be?

With such headwinds working against risk-on assets like stocks and bitcoin, the crypto sector is unlikely to have a good year, Thompson said. The fact that the White House doesn’t seem overly concerned about a potential recession is also a strong signal, he said.

“Bessent is coming in saying, ‘We need to right the ship.’ And righting the ship means cutting off the juice that was powering these crazy asset prices. The direct result of their policies working is a lower stock market,” Thompson said.

But how long is Trump likely to maintain course? Until it becomes too painful and even Trump’s political base tells him to cut it out, or until the beginning of 2026 — you can’t be pushing a country into a recession with midterm elections coming up.

“I equate this to a controlled burn. They’re trying to purposefully clear the brush so that it doesn’t become a bigger problem. But sometimes controlled burns become forest fires,” Thompson said. “I think it’s going to be a long kind of slog through the year as they try to enact these policies.”

The first quarter of 2025 tells a clear story about DeFi’s evolution. While yields across major lending platforms have compressed significantly, innovation at the market’s edges demonstrates DeFi’s continued maturation and growth.

The Great Yield Compression

DeFi yields have declined sharply across all major lending platforms:

The vaults.fyi USD benchmark has fallen below 3.1%, below the U.S. 1-month T-bill yield of ~4.3% for the first time since late 2023. This benchmark, a weighted average across four leading markets, approached 14% in late 2024.

Spark has implemented four consecutive rate decreases in 2025 alone. Starting the year at 12.5%, rates were cut to 8.75%, then 6.5%, and now sit at 4.5%.

Aave’s stablecoin yields on mainnet are around 3% for USDC and USDT, levels that would have been considered disappointing just months ago.

This compression signals a market that’s cooled significantly from late-2024’s exuberance, with subdued borrower demand across major platforms.

The TVL Paradox: Growth Despite Lower Yields

Despite falling yields, major stablecoin vaults have experienced extraordinary growth:

Collectively, the largest vaults on Aave, Sky, Ethena, and Compound have nearly quadrupled in size over the past 12 months, expanding from about $4 billion to about $15 billion in supply-side deposits.

Despite Spark’s consecutive rate cuts, TVL has grown more than 3x from the start of 2025.

As yields have fallen from nearly 15% to under 5%, capital has remained sticky. This seemingly contradictory behavior reflects increasing institutional comfort with DeFi protocols as legitimate financial infrastructure rather than speculative vehicles.

The Rise of Curators: DeFi’s New Asset Managers

The emergence of curation represents a significant shift in DeFi lending. Protocols like Morpho and Euler have introduced curators who build, manage, and optimize lending vaults.

These curators serve as a new breed of DeFi asset managers, evaluating markets, setting risk parameters, and optimizing capital allocations to deliver enhanced yields. Unlike traditional service providers who merely advise protocols, curators actively manage capital deployment strategies across various lending opportunities.

On platforms like Morpho and Euler, curators handle risk management functions: selecting which assets can serve as collateral, setting appropriate loan-to-value ratios, choosing oracle price feeds, and implementing supply caps. They essentially build targeted lending strategies optimized for specific risk-reward profiles, sitting between passive lenders and sources of yield.

Firms like Gauntlet, previously service providers to protocols like Aave or Compound, now directly manage nearly $750 million in TVL across several protocols. With performance fees ranging from 0-15%, this potentially represents millions in annual revenue with significantly more upside than traditional service arrangements. Per a Morpho dashboard, curators have cumulatively generated nearly 3 million in revenue and based on Q1 revenue are on track to do 7.8mm in 2025.

The most successful curator strategies have maintained higher yields primarily by accepting higher-yielding collaterals at more aggressive LTV ratios, particularly leveraging Pendle LP tokens. This approach requires sophisticated risk management but delivers superior returns in the current compressed environment.

As concrete examples, yields on the largest USDC vaults on both Morpho and Euler have outperformed the vaults.fyi benchmark, showing 5-8% base yields and 6-12% yields inclusive of token rewards.

Protocol Stratification: A Layered Market

The compressed environment has created a distinct market structure:

1. Blue-chip Infrastructure (Aave, Compound, Sky)

Function similar to traditional money market funds

Offer modest yields (2.4-6.5%) with maximum security and liquidity

Have captured the lion’s share of TVL growth

2. Infrastructure Optimizers & Strategy Providers

Base Layer Optimizers: Platforms like Morpho and Euler provide modular infrastructure enabling greater capital efficiency

Strategy Providers: Specialized firms like MEV Capital, Smokehouse, and Gauntlet build on these platforms to deliver higher yields upwards of 12% on USDC and USDT (as of late March)

This two-tier relationship creates a more dynamic market where strategy providers can rapidly iterate on yield opportunities without building core infrastructure. The yields ultimately available to users depend on both the efficiency of the base protocol and the sophistication of strategies deployed on top.

This restructured market means users now navigate a more complex landscape where the relationship between protocols and strategies determines yield potential. While blue-chip protocols offer simplicity and safety, the combination of optimizing protocols and specialized strategies provides yields comparable to what previously existed on platforms like Aave or Compound during higher rate environments.

Chain by Chain: Where Yields Live Now

Despite the proliferation of L2s and alternative L1s, Ethereum mainnet continues to host many of the top yield opportunities, both inclusive and exclusive of token incentives. This persistence of Ethereum’s yield advantage is notable in a market where incentive programs have often shifted yield-seeking capital to newer chains.

Among mature chains (Ethereum, Arbitrum, Base, Polygon, Optimism), yields remain depressed across the board. Outside of mainnet, most of the attractive yield opportunities are concentrated on Base, suggesting its emerging role as a secondary yield hub.

Newer chains with substantial incentive programs (like Berachain and Sonic) show elevated yields, but the sustainability of these rates remains questionable as incentives eventually taper.

The DeFi Mullet: FinTech in the Front, DeFi in the Back

A significant development this quarter was Coinbase’s introduction of Bitcoin-collateralized loans powered by Morpho on its Base network. This integration represents the emerging «DeFi Mullet» thesis — fintech interfaces in the front, DeFi infrastructure in the back.

As Coinbase’s head of Consumer Products Max Branzburg has noted: «This is a moment where we’re planting a flag that Coinbase is coming on-chain, and we’re bringing millions of users with their billions of dollars.» The integration brings Morpho’s lending capabilities directly into Coinbase’s user interface, allowing users to borrow up to $100,000 in USDC against their bitcoin holdings.

This approach embodies the view that billions will eventually use Ethereum and DeFi protocols without knowing it — just as they use TCP/IP today without awareness. Traditional FinTech companies will increasingly adopt this strategy, keeping familiar interfaces while leveraging DeFi’s infrastructure.

The Coinbase implementation is particularly notable for its full-circle integration within the Coinbase ecosystem: users post BTC collateral to mint cbBTC (Coinbase’s wrapped Bitcoin on Base) and borrow USDC (Coinbase’s stablecoin) on Morpho (a Coinbase-funded lending platform) atop Base (Coinbase’s Layer 2 network).

Looking Forward: Catalysts for the Lending Market

Several factors could reshape the lending landscape through 2025:

Democratized curation: As curator models mature, could AI agents in crypto eventually enable everyone to become their own curator? While still early, advances in on-chain automation suggest a future where customized risk-yield optimization becomes more accessible to retail users.

RWA integration: The continued evolution of real-world asset integration could introduce new yield sources less correlated with crypto market cycles.

Institutional adoption: The scaling institutional comfort with DeFi infrastructure suggests growing capital flows that could alter lending dynamics.

Specialized lending niches: The emergence of highly specialized lending markets targeting specific user needs beyond simple yield generation.

The protocols best positioned to thrive will be those that can operate efficiently across the risk spectrum, serving both conservative institutional capital and more aggressive yield-seekers, through increasingly sophisticated risk management and capital optimization strategies.

The U.S. Commodity Futures Trading Commission (CFTC) withdrew two pieces of crypto-related staff guidance on Friday, further streamlining its approach to crypto regulation.

The first advisory rescinded on Friday was Staff Advisory No. 18-14, Advisory with Respect to Virtual Currency Derivative Product Listings. Originally published in May 2018, the advisory established guidelines for crypto-related derivatives, including requiring reporting firms to maintain “close coordination with [the] CFTC surveillance group” and establishing a large trader reporting threshold of five bitcoins (or the equivalent value for other cryptocurrencies), among other suggestions. On Friday, the CFTC published a letter saying that “additional staff experience” and “increasing market growth” had rendered the guidance unnecessary.

The second advisory, Staff Advisory No. 23-07, Review of Risks Associated with Expansion of DCO Clearing of Digital Assets, from May 2023, “emphasize[d] compliance” with CFTC regulations due to the “hieghtened cyber and other operational risks that may be associated with digital assets.” This guidance was withdrawn for another reason — to clearly treat crypto-related derivatives and their issuers fairly, the CFTC suggested. In a separate letter on Friday, the CFTC said it was rescinding Staff Advisory No. 23-07 “to ensure that it does not suggest that its regulatory treatment of digital asset derivatives will vary from its treatment of other products.”

The CFTC’s sister regulatory agency, the U.S. Securities and Exchange Commission (SEC), has overhauled its approach to crypto regulation since President Donald Trump took office in January. Under the new leadership of Acting Chair Mark Uyeda, the SEC has created a Crypto Task Force that has spearheaded its transformation, engaging with the industry and backing down from a host of lawsuits and investigations into crypto companies that began under the leadership of former Chair Gary Gensler.

Though the SEC’s rapid transformation may be flashier, the CFTC is currently undergoing a transformation of its own, streamlining its regulatory strategy as part of Acting Chair Caroline Pham’s plan for the agency “get back to the basics.” In addition to the two pieces of dropped crypto-related guidance, the agency has rescinded other non-crypto-related staff advisories and overhauled its enforcement division, slashing a multitude of specialized enforcement teams down to just two, pledging that a simplified enforcement division would be more efficient and “stop regulation by enforcement.”

Liz Davis, a Washington, D.C.-based partner at Davis Wright Tremaine LLP and a former chief trial attorney in the CFTC’s Division of Enforcement, told CoinDesk she sees the two pieces of rescinded crypto guidance as in line with Pham’s “back to basics” approach to running the agency.

But Davis also suggested that the changes could be tied to a larger restructuring going on at the CFTC.

“They’re probably undergoing a reorganization with everything that’s going on with [the Department of Government Efficiency (DOGE)],” Davis said, adding that Pham’s ongoing efforts to “centralize” the CFTC’s operations could help facilitate a reorganization.