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Rates held relatively steady on Term this past week for the USDC/sDAI and ETH/wstETH pairs. Of note, was a sharp increase in demand for the USDC/wstETH pair that saw a record 1mm USDC cleared at a rate of 4.80%. This past week also marked the first week Term auctions were held for a 12-week term. The rate to borrow ETH cleared at 2.50%.
This week's macro section looks into recent dynamics in the digital asset derivatives markets. Futures and derivatives prices are relevant to crypto funding markets. The difference between the futures price and the cash or "spot" price is called the "basis." When the basis is positive, a trader can (i) buy spot BTC, for example, and (ii) sell an equal amount of BTC futures to lock in the price difference (or basis) upon futures expiry. So long as the trader has cash to fund this trade, the trade is essentially a "risk free" arbitrage. In an efficient market, the implied interest rate from the basis should be consistent with the benchmark risk-free rate (e.g. US T-bills). Crypto, however, is far from an efficient market.
Since the Fed "pause" early November and news of a potential BTC ETF approval that would unlock retail inflows into the asset class, open interest in BTC and ETH futures on the CME has increased significantly.
Consistent with the increase in open interest, the implied funding rate or "APR" (far left column) based on current BTC and ETH prices have risen sharply and currently imply a range from 8.6%-15.2% according Laevitas. The widening basis suggests that the demand for leveraged exposure to the majors (BTC/ETH etc) has increased at a much faster pace than funding rate arbitrageurs are able to accommodate.
Some of this demand is finding it way into DeFi money-markets where rates are still significantly lower than those implied by crypto derivatives markets. Indeed the difference between borrowing USDC against ETH at a 125% margin ratio is not much different than buying ETH futures with a 25% margin requirement (and paying interest in the form of the basis). This could explain, in part, the recent rise in DeFi rates an why DeFi rates tend to be pro-cyclical (rise in bull markets/fall in bear markets). So long as the implied funding rate of crypto futures remains elevated, expect continued upward pressure in DeFi rates markets. Keep an eye on open interest for signs of reprieve.
In the variable rate markets, USDC rates re-accelerated to the upside, with the average borrow rate rising +26bps from 7.06% to 7.32% on a 30-day trailing basis.
Volatility in variable rate USDC markets continue to remain elevated across the board but muted relative to recent extremes. While the volatility has dampened somewhat in the past week after the execution of Aave proposal 375 on November 25, raising the stablecoin base rate at the optimal utilization ratio to 5% up from 3.5%, intraday highs have continued to peak above 10% in the days since execution of the change. As highlighted in the macro section, so long as crypto derivatives markets continue to offer double-digit implied funding rates, even a rise to a 5% base rate may not be sufficient for Aave variable markets to settle into an equilibrium.
ETH borrow rates on Aave V3 continue to decline, falling -6bps from 2.88% to 2.82% on a 30 day trailing basis and held steady at around 2.74% over the past couple of weeks. This is despite a continued rise in the 30 day trailing CESR staking rate from 4.14% to 4.19% week over week.
Utilization continues to hover in the high 70s, just under the optimal utilization rate of 80% suggesting that the ETH market is settling into some semblance of equilibrium in the near term.
