This week saw TVL hit the $10mm milestone aided by a record wETH auction that cleared over 470 ETH in volume at 2.325% and a new single auction record of 2mm USDC cleared in a snap auction to borrow USDC against cbETH at 6.55%  annualized for a four-week term. Overall, fixed rates held steady in the regularly occurring auctions  despite continued volatility in the variable rate markets.

Historical ETH and USDC clearing rates on Term

Variable Rate Markets

In the variable rate markets, USDC rates continue to rise with the 30-day trailing average borrow rate rising another +20bps from 5.02% to 5.23% week on week.

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Intraday volatility remained elevated with USDC utilization rates continuing to remain at the utilization kink throughout the week.

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This marks the second consecutive month in which the 30d trailing rate has been on the rise with utilization consistently at or above the utilization kink. As some readers may be familiar, variable rates on Aave are not entirely market determined. To the contrary, the terminal rate at the utilization kink before rates begin to rise exponentially is a parameter set via governance.  Consistent utilization at or above the kink is evidence that the terminal rate is too low.

An Aave proposal is currently in place to raise the terminal rate (base rate) to 5% across all stablecoins (up from 3.5% - 4%). Moreover, in the past week, Gauntlet made additional recommendations (in the same proposal) to move the utilization kink to 90% (up from 80%) for DAI, USDT, and FRAX. Pushing up utilization is the same as reducing the reserve held as buffer against liquidation to protect against de-peg events. If this proposal is passed, DAI, USDT and FRAX supply currently held in "reserve" will be made available for borrow on Aave V3.

Keep an eye on this proposal. While it is hard to say whether a 5% base rate is sufficiently high to clear the market, assuming that it is, expect interest rate volatility to dampen and settle for the medium term around this new level.

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