Auctions resumed this week with over $5M in stablecoin markets and over 500E in ETH markets. A large 1000+ ETH against weETH loan rolled off, but was offset in part by 408E in new loans against tETH. Rates on Term held steady relative to December levels, even as basis rates and Aave supply rates haven begun to fall off a cliff.
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In derivatives markets, funding rates continued its decline, with 3-month basis falling -67bps to 12.87% and perpetual funding rates declined by a whopping -408bps to 9.60% on a 30-day trailing basis.
Consistent with this decline, DeFi rates are beginning to pick up on a relative basis, coming off cycle lows at a rapid pace and closing the week at 128% relative to derivatives rates.
Despite this rapid shift in tone in funding markets, BTC remains stable in the 90-105k range suggesting that levered longs hoping to make a quick buck are getting washed out.
Turning to DeFi variable rate markets, floating rates follow suit, closing down -56bps on the week to 12.47% on a 30-day trailing basis. Over a shorter lookback period (just seven days), Aave rates averaged 11.60% on the week, foreshadowing lower rates ahead.
Diving in the microstructure of Aave USDC markets, utilization continues to decline rapidly. As was the case last week, this decline was not driven by reduced borrow demand / liquidations as was the case last summer, but rather increased supply into Aave.
A look into the intraday charts show that rates are exhibiting a slow bleed lower with no discernable intraday volatility.
With more and more supply chasing yield against a fixed borrow base, Aave suppliers are cannibalizing each others’ yields. The spread between supply and borrow rates close the week up near 275bp wide.
It’s unclear where this new supply is coming from, but with asset prices stable and funding rates on the decline, it appears rates can continue to bleed lower in DeFi in the near term.
Turning now to ETH markets, ETH rates continue to reverse to the downside, with borrow rates declining -9bps to 2.83% on a 30-day trailing basis. This decline far exceeds the decline in the CESR index, which closes the week down -2bps to 3.13% on a 30-day trailing basis.
Market internals otherwise show a relatively stable market with both supply and demand holding steady with a slight downward bias.
Intraday charts are consistent with this dynamic, showing that ETH rates remained stable throughout the week.
This slow but steady decline in borrow demand is consistent with a narrowing arbitrage spread between wstETH and wETH. Until rates decline further, expect looping demand to remain tepid.
With cryptoasset markets continuing to trade rangebound, it is no surprise that fast money levered longs are beginning to bail - driving funding rates lower. With Trump’s inauguration scheduled for Jan 20, expected sideways listless markets to continue and DeFi rates to continue to bleed lower next week.
