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February 23, 2024

Weekly Market Recap: February 23, 2024

Over $2.67mm in total volume matched on Term this week. Demand for USDC remains robust with rates steadily climbing across the board, consistent with rising derivatives funding rates in this recent market runup. Demand to borrow against wBTC has seen a noticeable uptick in recent weeks and is beginning to crowd out USDC supply against wstETH. In the ETH lending markets, Term’s weETH LRT saw maturing loans extend by four-weeks at a rate of 12.25% (down -50bps from the week prior). In total, 71.5 ETH cleared with excess supply available at those rates.  

Variable Rate Markets

USDC Markets

In the variable rate markets, USDC rates have been reaccelerating to the upside in the past couple weeks, rising +102bps from  7.08% to 8.10% on a 30-day trailing basis.  

Consistent with rising borrow rates, intraday volatility has picked up significantly compared to the period of relative calm seen in late January. Yet despite the return of intraday volatility in recent weeks, intraday spikes remain relatively muted compared to the extremes seen in mid January.  Aave’s increase of the base rate to 6% last month is perhaps helping to better balance swings around the utilization kink.    

Much of this recent reacceleration to the upside is likely driven by futures basis and perp funding markets (more on this below). While this recent market runup has taken BTC and ETH to new cycle highs, funding rates remain subdued relative to January peaks (also more on this below). This pattern suggests that this recent runup has not been driven entirely by overextended levered longs, but rather supported by real money inflows and that there could be more room to the upside (in both prices and funding rates).

ETH Markets

Turning to ETH borrow rates for a moment, rates on Aave V3 have been rapidly reaccelerating to the upside, rising +17bps over the past two weeks to close at 2.57% on a 30-day trailing basis. What is notable is that this increase has been inconsistent with the CESR  Staking Index, which closes this week down -3bps at 3.56% vs 3.59% two weeks prior.


Diving in the the microstructure of Aave’s ETH market, we find that increased utilization (rather than declining supply) is the primary driver of this rise in ETH borrow rates.

One can only speculate, but based on recent anecdotes, much of this newfound on-chain ETH borrow demand is likely being driven by Eigenlayer points farming activity.

Basis Markets

Previous articles have highlighted the procyclical nature of DeFi money markets and hinted at a link between futures and derivatives funding rates as a key driver of this phenomenon. This week we take a deeper look at the relationship between the two markets.  

Above, we plot the Aave V3 borrow rate (in purple) vs. the (i) 3mo (ETH) futures basis and the (ii) open-interest weighted perp funding rate. All time series shown on the chart are 30-day rolling geometric averages and cover the period beginning June 1, 2023 to present.  Analysis of this data shows a high correlation between Aave V3 borrow rates and the 3mo basis/ perp funding rates, clocking in at 94.30% and 88.22%, respectively.

This correlation is supported by anecdotes of traders who arbitrage the rate differential between DeFi money markets and derivatives funding rates. When the spread gets too wide, arbitrage opportunities arise for traders to borrow in DeFi to fund levered long positions in BTC and ETH futures and derivatives markets at significantly higher rates. Due to regulatory and operational frictions, however, the ability to facilitate this arbitrage has been limited to a few players and DeFi rates have generally been slow to respond.

These frictions have historically prevented DeFi markets from fully converging to futures and derivatives funding rates. The chart above shows the passthrough rate of the 3mo ETH basis into DeFi borrow rates as represented by rates on Aave V3. The chart shows that passthrough has generally ranged from about 60% to 100% in the past eight to nine months with an average passthrough of about 80%. With the current passthrough rate hovering at the lower end of the range (~69%), there is significant room to the upside for DeFi rates to converge toward derivatives funding rates in the medium term. The coming of Ethena’s sUSDe  this week will only serve to further accelerate this trend.


Lastly, we review on-chain stablecoin inflows this week. Since last month, stablecoin supply on-chain has increased by roughly $5.2bn. Tether and USDC have been the primary beneficiaries at 3bn and 2bn, respectively. Beyond that, FDUSD has gained roughly 600mm at the expense of TUSD and Ethena’s USDe has gained about 300mm at the expense of Maker’s DAI.  

Looking cross-chain, Ethereum is the receipient of roughly 50% or 2.5bn of the stablecoin inflow, with Tron in second place with about 1.25bn increase. The biggest surprise this past month is an increase of roughly 300mm in stablecoin supply to the Sui ecosystem.

Looking forward, the combination of (i) continued real money inflows into bitcoin ETFs, (ii) increased speculative activity in futures/derivatives markets, and (iii) the coming of Ethena’s sUSDe bringing perpetual funding rates to DeFi, expect rates to continue to trend up in the near and medium term.

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