Term smashed another protocol record, clearing ~$19M notional in a single week across seven auctions and cleared >$8M (2000 ETH) against tETH in the largest single transaction to date on the platform. Overall, USDC rates ticked up again to clear at 9.5% for blue-chip collateral and 14%+ for exotics. ETH rates held steady against wstETH, weETH and tETH.
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In derivatives markets, funding rates accelerated to the upside, with 3-month basis rising +184bps to 15.23% on a 30-day trailing basis and perpetual funding rates rising by +413bps to 22.91% on a 30-day trailing basis.
Despite this outsized rally, DeFi rates managed to keep up this week with the result that the DeFi passthrough rate remained stable near cycle lows.
The levels and pace of acceleration in derivatives funding rates is nearing cycle peaks, which suggests that a pause may be in order in the near term as we move into the holidays and short term levered profits are closed out ahead of winter festivities.
Turning to DeFi variable rate markets, floating rates kept pace with 3-month basis rates, rising +181bps on the week to close at 10.61% on a 30-day trailing basis. On a shorter lookback period (just seven days) Aave rates averaged 16.73% on the week. Following Aave’s interest rate adjustment to the base rate from 6.25% —> 9.25% last week, Spark quickly followed suit with an (intermeeting) proposal to further raise their savings rate from 9.5% —> 12.5%, scheduled to vote sometime this month. If this happens, Aave is expect to do the same to keep pace with Sky.
Spark’s decision is indeed justified by market internals. Last week’s 3 percentage point hike did very little to reduce demand below the 90% utilization kink and clear the market.
To the contrary, intraday rates continue to spike upwards of 50-60%.
And as a natural consequence of higher rates and fixed utilization cap, the spread between borrow and lend rates continue to rise to 250bps over a 30-day trailing period.
Given these dynamics, Spark’s proposal is likely to be accepted by governance and DeFi floating rates will continue to rise in the near term.
Turning to ETH markets, ETH rates reversed course for a slight gain on the week, with rates rising +4bps to 2.67% on a 30-day trailing basis. This rise is inconsistent with the CESR staking index, which is flat over the same period, closing the week unchanged at 3.25% on a 30-day trailing basis.
Overall, utilization remains healthy just under the 90% utilization kink — as high as possible without triggering volatile intraday rate movements,
though some signs of stress are beginning to appear. ETH borrow rates exhibited intraday volatility over the past few days, due to increased borrow demand pushing against the utilization kink. Keep an eye on this over the next week to see if this is just a blip or something more permanent.
Derivatives rates are beginning to reach a fever pitch and DeFi rates getting towards cycle highs. On the other hand, ETH just broke 4k for the first time since March and BTC closes out the week above the salient 100k mark and the market is not showing signs of stopping (aside from a kerfluffle of liquidations the first time BTC hit 100k earlier this week). Given market strength expect rates to continue to rise in the near term, with some risk of correction as we enter year-end later this month.
