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May 17, 2024

Weekly Market Recap: May 17, 2024

Stablecoin rates held steady this week vs the majors and LSTs, clearing around 7.5% (right in the middle of the Aave USDC supply and borrow rates). Against LRTs, rates were mixed. As continues to expand its eligibility as collateral across various platforms and L2s, rates are beginning to decline as the market becoming more and more competitive. ETH rates against weETH collateral continue to fall, settling in at just 11.75% for a four week term, but at limited capacity. This past week Term also held its first ever Renzo ezETH auction. It was a special twelve-week term maturing August 29 and saw a sizable 500 Eth in demand at 15%, amidst a backdrop of rising borrow demand against ezETH on competing variable rate platforms.

Variable Rate Markets

Basis and Perpetuals Markets

Futures and perps basis implied funding rates are beginning to stabilize, with 3-mo basis declining -47bps and increasing +56bps on on a 30-day trailing basis, respectively. Perp funding rates and 3-mo basis close the week at 7.61% and 8.15%, respectively, on a 30-day trailing basis  

Consistent with a bounce in derivatives funding rates, the DeFi borrow passthrough rate fell from recent extremes. Despite this bounce, however, Aave V3 borrow rates continue to trade through perpetual swap funding rates prevailing on the major perp swap exchanges.

USDC Markets

In the variable rate DeFi markets, USDC borrow rates continue to the downside, falling by -73bp from  9.71% to 8.98% on a 30-day trailing basis.  

Intraday volatility remains minimal with the market at a happy equilibrium within the 7-9% range.

Given that borrow utilization remains subdued, the supply/borrow spread on Aave remains at recent highs (around 225bps wide). At these levels participants are leaving a significant amount of money on the table - in economic jargon - leading to material “deadweight loss” on Aave.

ETH Markets

Turning to ETH lending markets, rates on Aave V3 are beginning to trim losses, closing down +4bps on the week at 2.33% up from 29% the week prior on a 30-day trailing basis. This gain is largely consistent with the rise in CESR staking rates, which closed +3bps on the week.

Lastly, turning to market internals, ETH borrow utilization has shown signs of life in recent weeks. This is perhaps attributed to an increase in borrow demand on the back of the inclusion and increasing borrow caps against EtherFi’s weETH token.

Overall, the inclusion of weETH on Aave V3 has allowed Aave to regain market share and the impact of access to cheap ETH liquidity on Aave has had a material impact on ETH lending rates across the ecosystem.  In just a few short weeks, Aave has attracted ~700mm in weETH deposits across mainnet and Arbitrum.

Looking forward

A dovish CPI print mid-week led to sharp bounce in crypto markets. BTC, the only major token with an ETF, led the way. ETH, in stark contrast, continues to struggle to keep its head above water. Data from velodata show that while ETH open-interest has gone up since CPI, implied basis yields remain flat to down over the same period. This suggests that the market has been taking advantage of the pop to open shorts on ETH. This all smells like a set up for the market to position ahead of expectations that the SEC will deny pending ETH ETF applications on May 23. As we’ve seen in the past, however, the market likes to do the opposite of what everyone expects. Don’t be surprised if ETH rallies back, even if the SEC denies these applications as expected, as short sellers cover their positions coming out of the catalyst event. Perhaps that would also help to alleviate the downward pressure in ETH derivatives funding rates, and the DeFi money markets in general.

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