Volumes on Term hit record highs this week. USDC loan volumes exceeded 3mm with the majority of this demand looking to collateralize with wBTC. Users took advantage of the delayed response in DeFi money markets to the ETH ETF news to lock in fixed rates on Term. USDC rates cleared at 8% just a small tick up from the 7.5% clearing rates seen last week. In the ETH markets, demand was evenly spread between weETH and ezETH in a slight tick up from the week prior at 12.5% and 16% for one month terms, respectively.
News of an impending ETH ETF approval breathed new live into the futures and perps basis markets this week, with implied rates rising +426bps and +603bps week over week, respectively. Implied funding rates close the week at 12.36% (perps) and 13.72% (3mo basis).
On a 30-day trailing basis, perp funding rates and 3-mo basis rose +79bps and +166bps, respectively, to close the week at 8.95% and 9.27%. This move brings the 30-day trailing rates back above DeFi lending rates for the first time in a month.
In the variable rate DeFi markets, USDC borrow rates stabilized, falling only -33bp from 8.98% to 8.66% on a 30-day trailing basis.
The 30-day moving average, however, masks a late week surge in utilization causing intraday borrow rate spikes above 20% late in the week. After a short hiatus from wild intraday swings, variable rate lending is back to its typical and erratic bull-market ways.
While higher utilization rates typically lead to tight spreads, borrow/lend spreads on Aave remain relatively wide at just above 200bps on a 7-day trailing basis.
In sharp contrast to stablecoin lending markets, ETH rates on Aave V3 fell sharply by -36bps week over week to close at 2.14% down from 2.50% the week prior.
Looking into market internals, its apparent that this decline is due to a combination of both a sharp rise in ETH supply and a material decline in ETH borrow demand.
The result of this sharp and sudden decline in utilization is that lenders on Aave are now only receiving 59% of the borrow rate paid by borrowers.
Turning to stablecoin money flows, overall stablecoin supply increase by +1.2bn month-over-month. This is down from the +6.2bn inflows seen the month prior. The entirety of this inflow was USDT driven, with USDC (-446mm) giving way to USDe (+365mm) and Blackrock’s BUIDL gaining +146mm. With DeFi rates subdued in the month of May, these tepid inflows relative to inflows seen in Q1 2024 are not entirely surprising.
In the past two weeks, the market benefitted from the tailwinds generated by a dovish CPI print last week and the provisional approval of an ETH ETF this week. Loser monetary policy and real-money institutional inflows is very good for the space! Expect derivatives funding rates to stay elevated in the near to medium term as the market positions for the inflows these ETH ETF launches promise to bring. In the meantime, lock in rates on Term while they are still low.
