Rates held steady at Term this week. Over 2.2mm USDC and 42 ETH cleared this week across four auctions. For ETH borrows, the results of the 3 months auction suggest that the curve remains relatively flat. This pattern is consistent with bull market dynamics where ETH borrow demand (for hedging purposes) declines.

Historical ETH and USDC clearing rates on Term

‍

‍

Variable Rate Markets

‍

‍

USDC Markets

In the variable rate markets, USDC rates continue to rise at a rapid pace with borrow rates rising +54bps from  8.36% to 8.90% on a 30-day trailing basis.

‍

‍

Volatility in variable rate USDC markets continue to remain elevated across the board. It remains to be seen whether raising the base rate from 5% to 6% will stabilize the markets (see governance vote from two weeks ago). Given that 30-day trailing rate is nearing 9% and futures/perps basis well into the double digits it seems unlikely that this will be sufficient to satisfy market demand.

‍

‍

ETH Markets

ETH borrow rates on Aave V3 fell -3bps on the week to 2.82% on a 30-day trailing basis, while the CESR Staking Index, on the other hand, saw much larger dip -16bps on the week due to dampened activity around the holidays and increased staking volume (in part due to the recent restaking narrative).

‍

‍

Of note this week as a sharp increase in ETH supply that took utilization south of 70%, well below the 80% UOPT level.

‍

Contrary to DeFi stablecoin rates (that tend to trade pro-cyclically with the crypto markets) ETH borrow rates historically trade in a counter-cyclical fashion.  This pattern suggests that risk lies to the downside for ETH rates in the medium term. Specifically, a crypto bull run is likely to (i) increase available ETH supply for lending; (ii) decrease ETH borrow demand; and (iii) reduce ETH staking yields (best alternative yield).

Desire to maintain or increase ETH long exposure (increase supply):

The underlying driver behind increased demand for leveraged longs in ETH via perps/futures in bull market periods is the same driver that brings new naked ETH stakers and lenders to market. Some portion of newly established ETH long positions will be looking for ways to augment their returns through ETH lending/staking, thereby increase available ETH supply.  

Reduced hedging motivated borrow demand (decrease demand):

Bull markets also see reduced ETH hedging demand. The desire to hedge ETH exposure through ETH borrows declines significantly in large bull runs. These dynamics reduce ETH borrow demand in ETH lending markets.

Diluted Native Staking Yields (decrease staking yield):

Lastly, while bull markets see increased network activity driving up network fees, it also brings in new holders looking to earn staking yield to augment returns. Depending on the relative growth of network activity vs. the amount of ETH staked it is very possible that ETH staking yields will go down in a bull market. The restaking incentives driving new ETH into existing ETH staking services could further accelerate this dynamic.

This communication is strictly confidential and is intended exclusively for the use of the person to whom it was delivered by Terminal 0, Ltd. ("Term"). It may not be reproduced or re-transmitted in whole or in part without authorization. The contents of this communication and any attachments are solely for information purposes and are for your internal use only. Nothing contained herein constitutes an offer, solicitation, or recommendation to sell, or an offer to buy any securities, investment products, or investment advisory services.

This document may contain forward-looking statements and projections that are based on Term's current beliefs and assumptions and on information currently available that Term believes to be reasonable. However, such statements necessarily involve risks, uncertainties, and assumptions, and recipients may not put undue reliance on any of these statements.

Although the information provided herein has been obtained from sources which Term believes to be reliable, Term does not guarantee its accuracy, and such information may be incomplete or condensed. The information is subject to change without notice. Since Term furnishes all information as part of a general information service and without regard to a recipient's particular circumstances, Term shall not be liable for any damages arising out of any inaccuracy in the information.

The information in this presentation is not intended to provide, and should not be relied upon for, accounting, legal, or tax advice, or investment recommendations. Each recipient should consult their own tax, legal, accounting, financial, or other advisors.

The front-end interface for the Term Protocol located at term.finance is not available to U.S. persons as well as persons located in certain other jurisdictions. Please see the Terms of Use.