Over 1.5mm USDC cleared this week at Term, with rates holding steady relative to previous auctions. ETH lending rates, on the other hand, dropped significantly down to 2.1% consistent with Aave V3, which saw utilization drop to 64% on account of large ETH supply inflows in recent weeks. With various restaking narratives picking up steam, wstETH collateral is beginning to flow into other opportunities, further reducing demand to borrow (even at slightly wider spreads). Speaking of restaking, Term is holding its first auction backed by ether.fi’s liquid restaking token (LRT) - weETH. With various estimates pricing eigenlayer points at the equivalent of ~10-20% APY, this promises to be an interesting auction.  

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Variable Rate Markets

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USDC Markets

In the variable rate markets, USDC rates are finally taking a breather falling by -19bps from  8.90% to 8.71% on a 30-day trailing basis from two weeks ago and relatively flat over the past week. It is interesting to observe that the timing of this deceleration in rates seems to coincide with the launch of the BTC ETF on January 11.

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Despite this pause in rates, volatility in variable rate USDC markets continue to remain elevated across the board. Intraday highs in the borrow rate spiked above 20% on two occasions in the past week.

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ETH Markets

ETH borrow rates on Aave V3 fell -12bps on the week to 2.50% on a 30-day trailing basis, consistent with the CESR Staking Index that continues to decline. The CESR  Staking Index finishes the week down -17bps to 3.79% vs 3.96% the week prior.

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Because staking yields are falling at a similar pace as the decline in ETH borrow rates, the potential arbitrage profits that can be earned has not improved with declining borrow rates. It is therefore unsurprising that recent new supply into Aave has remained unutilized over the past few weeks.

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Looking forward, expect USDC rates to trend up again as the market moves closer to the Bitcoin halvening in April. In the ETH market, expect rates to continue to decline unless network fees start to pick up again. Perhaps some volatility around the halvening would be a trigger to increased on-chain trading activity.

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