USDC rates continue to climb Term with 4-week USDC  clearing at 6.94% (against wstETH, high LTV) and at 10% fixed (against wBTC). Around $2.2mm out of a total volume of $2.3mm this week was USDC, consistent with recent trends. In Term’s ETH markets, weETH continues to be the most popular with a total of 66 ETH demanded but just 30E supplied at an elevated rate of 14.88%.  

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Variable Rate Markets

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Basis and Perpetuals Markets

Futures and perps basis implied funding rates heated up this week, rising +1.53% and +4.89% on a 30-day trailing basis for 3mo basis and perpetual funding, respectively. As of the time of writing, the open interest weighted perp funding rate closes the week at an astounding 48% spot rate, while 3-month basis closes at a much more muted 16.6% spot rate.

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While such rapid acceleration of derivatives funding rates is not sustainable for long, its apparent from the November ‘23 - January ‘24 runup that it can sustain for far longer than you would think.  

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USDC Markets

In the variable rate DeFi markets, USDC rates continue to accelerate to the upside in line with derivatives funding markets, rising +119bps from  8.16% to 9.34% on a 30-day trailing basis.  Aave USDC borrow rates close the week near cycle highs.

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Consistent with rising borrow rates, intraday volatility spiked over the past seven days. Yet despite extreme perp funding rates (50%+), intraday spikes never exceeded 25% and remain relatively muted compared to both the extremes seen in mid January.  

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To the extent that derivatives funding markets remain elevated, expect further passthrough into DeFi rates in the near term.

ETH Markets

Turning to ETH lending markets, rates on Aave V3 have begun to stabilize following a period of rapid reacceleration to the upside. ETH borrow rates rose just +3bps over the past week to close at 2.60% on a 30-day trailing basis. Stabilization of ETH borrow rates is consistent with CESR staking rates that close flat on the week.

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Narrowing in on the microstructure of Aave’s ETH market, we find that consistent with the recent stabilization in rates, ETH borrow utilization has begun to decline once again below the Aave utilization kink of 90%.

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The light blue area chart above shows that this decline in utilization is primarily driven by increased ETH supply on Aave V3 rather than a decline in demand.

Looking forward

In the near term, look for DeFi funding to remain elevated and rates to remain volatile given extremely elevated perpetual funding rates. In the medium term, and as we’ve seen in late January, these rates can quickly turn on a dime. With BTC near previous all-time highs it wouldn’t be unusual to see a pause as the market prepares for the next leg of the bull market. In the meantime, it may be a good time to lock in fixed rates on the supply side for the medium term outlook.

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