Peterson had not fought in 14 months since testing positive for synthetic testosterone, which caused the cancellation of a rematch with Amir Khan set for last May.
Peterson, who had twice knocked down Holt, caught him with a pair of right-handed blows. Peterson then landed a flurry with Holt on the ropes.
Referee Tony Weeks stopped the bout at 1:42 in the round.
"The last time I caught him on the ropes, I just let my hands go and didn't stop," Peterson said. "I just couldn't let up."
Peterson improved to 31-1-1 with 16 knockouts. He defeated Khan for the IBF and WBA 140-pound titles in December 2011, also in his hometown of Washington.
The WBA stripped Peterson of its title after the positive drug test. But the IBF allowed him to keep its belt, saying an independent investigation affirmed Peterson camp's claim that the results stemmed from treatment for a medical condition.
After the fight, Peterson spoke of trying to reclaim the WBA belt, which along with the WBC belt is held by Danny Garcia.
"I would love to fight Danny Garcia," Peterson said. "I still think that I am the champ, the WBA champ, and I want to get the fight to make that happen."
Holt (28-6, 16 knockouts) fell to 3-4 in his last seven bouts, including 0-3 in title fights.
He said he had struggled making weight for the fight, and was considering moving up to the 147-pound welterweight division after feeling fatigued Friday.
"I don't know if this weight class is for me anymore," Holt said. "My body just wasn't responding (during the fight). My body and my mind just weren't on the same page."
Holt began the fight as the aggressor, and appeared to catch Peterson early with a quick right-handed punch.
Peterson sent Holt to the canvas for the first time with a right hook in the fourth and him backpedaling again as the round ended.
In the sixth, Peterson landed a left hook and got Holt on the ropes, before sending him down a second time with a combination.
With his right eye swelling, Holt managed to make it out of the sixth round and avoid any significant damage in the seventh, as chants of "DC! DC!" and "Pete, Pete, Pete" rose from the crowd at the D.C. Armory.
Peterson finished a fatigued Holt in the eighth, sending the same crowd wild.
"I spent a lot of energy there trying to get him out, but I just had to shut him down and let him come to me," Peterson said.