Volumes on TERM picked up this week with 2.5M USDC cleared against wBTC and more than 1000 ETH against weETH. With rates on Term still offering a slight premium to floating rate markets, clearing rates were unchanged from the week prior.

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Variable Rate Markets

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Basis and Perpetuals Markets

In derivatives markets, funding rates accelerate to the upside, with 3-month basis rising +59bps to 7.70% on a 30-day trailing basis and perpetual funding rates rising by +61bps to 8.49% on a 30-day trailing basis.  

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DeFi rates continue to lag but hold near long-run averages relative to derivatives funding rates.

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With the election is just around the corner, expect derivatives funding rates to remain elevated in the near term.

USDC Markets

Turning to DeFi variable rate markets, rates continue to march upward in-line with derivatives, with USDC borrow rates rising +38bps on the week to close at 6.15% on a 30-day trailing basis. This was possible in part due to the implementation of a proposal to raise the kink rate to 6.25%, matching the USDS savings rate (as predicted las week).

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Despite the Aave rate hike, utilization continues to exceed the 90% kink. Indeed, the market traded above the optimal utilization on six of seven days this past week!

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Heavy utilization has taken intraday rates upwards of 50% at the peak — levels not seen since the CRV scare late last summer.  Given these dynamics it’s clear that Aave was too conservative in its setting of the optimal rate and will likely to be forced to hike again in the near future

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The bright side of elevated utilization levels is that lenders have benefitted from tighter borrow/lend spreads (100bps vs 150bp average).

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ETH Markets

Turning to ETH markets, ETH rates continue to climb, with rates rising +3bps, to close at 2.83% on a 30-day trailing basis as of the time of writing. This rise is contrary to the CESR staking index, which fell by -7bp over the same period to 3.31% on a 30-day trailing basis.

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Utilization remains on a knife’s edge just below the 90% utilization kink.

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As a result, the market has managed to avoid any meaningful utilization driven rate spikes.

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Looking forward

With derivatives implied funding rates on a steady march upwards and DeFi rates spiking to 50%+ intraday highs, expect the near term trend in DeFi money markets to be up. As mentioned last week, Q4 is typically a bullish time for crypto and as asset prices rise, so does the demand for leverage and DeFi rates.

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