Total volumes on Term saw a notable shift away from the majors (wBTC, wstETH) towards EtherFi’s weETH in the past couple of weeks. Rates for both USDC and ETH against weETH continue to clear at double-digit rates, despite an otherwise tempered lending market. Turning to the majors, fixed rates for stablecoins on Term against wBTC rose slightly to 9.0% fixed for a four-week term, consistent with stabilizing DeFi funding rates.  USDC rates against wstETH, on the other hand, saw a steep drop amidst deminishing demand and aggressive offers submitted by bomb-pot farmers who managed to achieve over 1000%+ apy on the play. Over the coming weeks, expect volumes to continue to shift toward weETH LRT collateral.

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Variable Rate Markets

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Basis and Perpetuals Markets

Futures and perps basis implied funding rates continue to drop steeply with perp funding rates and 3-mo basis declining -3.78% and -3.12% on on a 30-day trailing basis, respectively. Perp funding rates and 3-mo basis close the week around 13% on a 30-day trailing basis — not much higher than the 12% fixed rate loans that cleared on Term four weeks ago.  

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With the decline in derivatives funding rates, the DeFi borrow passthrough rate is starting to rise toward recent peaks. As of the time of writing, Aave V3 borrow rates are now roughly 75% compared to its derivates funding market counterparts.

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USDC Markets

In the variable rate DeFi markets, USDC borrow rates continue to fall on the week, declining by -82bps from  11.22% to 10.40% on a 30-day trailing basis.  

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Consistent with falling rates and declining borrow demand, intraday volatility flatlined over the course of the past two weeks. This dampening of intraday volatility is attributed to a governance proposal to raise stablecoin base rates on Aave to 12% (just in time  for peak interest rates) - passed on April 9 and executed on or around April 11, 2024.

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This sharp hike to the stablecoin base rate in conjunction with rapidly declining derivatives funding rates caused utilization to fall from 90% —> 74%. While this much reduce volatility is welcome, it has the unintended effect of significantly widening the supply/borrow rate spread.  

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The chart above shows the USDC supply rate/borrow rate spread on Aave V3 over time. The chart shows that this spread has widened significantly since the parameter change and is currently over 300bps wide. This dynamic is just another reminder of the drawbacks of the current state of DeFi lending on-chain. Variable rate protocols are forced to choose between extreme volatility or extremely wide spreads in fast moving environments such as these.  

ETH Markets

Turning to ETH lending markets, the story remains the same. Rates on Aave V3 continue to bleed to the downside, closing down -5bps on the week at 2.39% down from 2.44% the week prior on a 30-day trailing basis. CESR staking rates, on the other hand, held steady and managed to close unchanged on the week.

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Looking into market internals, ETH deposits have declined but utilization remains stable.

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The only other item of note this week is the recent addition of EtherFi’s weETH to Aave V3. Supply caps were maxed almost instantly. The rapid adoption of weETH across various blue-chip protocols and the rapid shift in auction volume into weETH collateral on Term in recent weeks suggests signs of weETH slowly obtaining blue-chip status within the DeFi community.

Stablecoin Flows

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Turning to our monthly stablecoin review, total stablecoin supply increased +8.3bn on the month. The vast majority of this was from USDT inflows, and to a lesser extent FDUSD. DAI managed to gain back some ground on account of Maker’s move to raise its stability fee to 13%, while USDC continues to lose ground to Ethena’s USDe.

Looking forward

DeFi lending markets are finally settling down after an extraordinary run-up in Q4 ‘23/ Q1 ‘24 that took DeFi rates from 3.5% to 15%+ in just a handful of months. This pause is good for DeFi markets, allowing participants breathing space to settle into a new equilibrium. It remains to be seen when the next runup will occur (perhaps when Aave/Maker decide to adjust their rates, once again) but in the meantime avoid bid/offer spreads and lock in fixed rates on Term!

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