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February 2, 2024

Weekly Market Recap: February 2, 2024

Around $2.25mm in total volume matched on Term this week. Borrow demand for USDC remains strong with $2mm cleared and rates ticking up +10bps on the week for a 4-week term. In the ETH lending markets, most of the action remained centered around Term’s weETH LRT offering. In total, 65.77 ETH cleared at 13.5% with unmet demand at and above those rates.  Anecdotes suggest that Eigenlayer points are trading at an implied APR of up to 60% in OTC markets, which explains continued (and rising) appetite to borrow at double digit yields.  

Variable Rate Markets

USDC Markets

In the variable rate markets, USDC rates accelerate to the downside, declining by -78bps from  8.35% to 7.58% on a 30-day trailing basis on the week.  

Consistent with falling borrow rates, intraday volatility remained muted in the earlier half of the week but has started to pick up again over the last few days.   Much of this volatility was driven by$20mm in USDC withdrawals on Jan 30 that triggered a bit of rebalancing.  

With DeFi rates coming off its highs, expect further supply (rather than demand) driven volatility in the short term as users offboard stablecoins in response to lower APYs.

ETH Markets

Turning to ETH borrow rates, rates on Aave V3 are beginning to stabilize, falling just -5bps on the week to close at 2.38% on a 30-day trailing basis. This decline is consistent with the CESR  Staking Index, which finishes the week down -6bps to 3.63% vs 3.69% the week prior.

Honing in on shorter windows, the 7-week trailing average closed up +8bps at 2.51% vs 2.43% the week prior and utilization on Aave ticked up +5% from 70.81% to 75.14%.

Should ETH utilization on Aave continue to increase at a +5% clip week-over-week, it won’t be long before volatility in ETH borrow markets begins to rear its head. While this is only speculative, one theory is that this recent increase in ETH borrow demand is related to the LRT Eigenlayer points meta of the past few weeks.

Up until recently, ETH staking yields have been the primary source of ETH borrow demand in the absence of ETH hedging demand (typical muted in bull markets). As such, ETH staking yield served as a cap on ETH borrow rates as arbitrageurs require a positive spread in order to make a profit. With some participants pricing expected APY on LRTs at 30%+ this raises the ceiling of what potential users are willing to pay to borrow ETH, which may lead to higher ETH rates in the medium term.

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