This month we have seen an increase in demand for cash, notably from BTC miners looking for long-term financing to support infrastructure development. Cash and stablecoin rates remain elevated both on exchanges and on-chain, ranging between 20-40% on exchanges.
Each month, Galaxy's Lending Desk aims to unravel the complexities of the crypto lending landscape, offering you a unique lens through which to view market trends and developments.
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This month we have seen an increase in demand for cash, notably from BTC miners looking for long-term financing to support infrastructure development. Cash and stablecoin rates remain elevated both on exchanges and on-chain, ranging between 20-40% on exchanges. Additionally, there has been significant interest in ETH ahead of the anticipated Eigen token airdrop. On the altcoin side we’ve seen demand for LTC and SOL. Bitcoin holders continue to look for yield options on their holdings with preference for slightly elevated rates and longer term.
Looking Forward:
The highly anticipated bitcoin halving is swiftly approaching, slated for April 20th. This event, recurring approximately every four years, is widely regarded as a bullish trigger, historically driving prices upward post-halving. We anticipate increased demand for leverage as we approach this event.
As we look beyond the upcoming halving, attention turns to the Ethereum spot ETF deadline, set for May 23. This impending event could pivot the focus from Bitcoin to Ethereum, potentially resulting in ETH outperforming other cryptocurrencies. We foresee a rise in traders seeking long positions in ETH/BTC as we draw closer to this deadline.
Interest rates are in full focus, particularly given the Federal Reserve's recent statements and key economic indicators such as CPI prints, payrolls, and inflation metrics. These factors collectively hint at a higher for longer scenario. Comparing December's outlook to March's, the forward curve has noticeably elevated, with 2-year treasury yields steadily increasing since the beginning of the year, reflecting this evolving trend.
MARKET UPDATE
Funding Rates Ease After Market Selloff, Climbing Steadily Toward Month's End
At the beginning of March, funding rates surged dramatically, driven by Bitcoin's climb to nearly $75,000. The excessively positive funding rates indicate a pronounced bullish bias, with open interest predominantly leaning towards long positions. This prevailing market sentiment propelled funding rates above the 60% mark.
In extremely bullish market environments like the one described above, there is a significant increase in demand for cash. This heightened demand arises from the desire to capitalize on cash intensive opportunistic trades such as the basis trade and other leveraged long positions. Upon analyzing on-chain data, particularly variable borrow rates for USDC on Ethereum Aave V3, we observe a sharp increase in borrowing costs during this period, indicating traders' willingness to pay higher rates for access to cash.
After the market sell-off on March 14th, we witnessed a normalization of funding and borrowing rates as leverage was removed from the system. However, just over a week later, these rates began to rise again, indicating a persistent bullish sentiment and ongoing demand for both cash and leverage.
2 Key trends
001
Ethena’s Stablecoin Yield Draws in More Than $1 Billion in Supply, with Over $400 Million Staked.
Since its official launch a little over two months ago, Ethena Labs’ “Synthetic Dollar”, USDe, has amassed a supply exceeding 1.4 billion. Unlike traditional stablecoins backed by cash or cash equivalents like USDC and USDT, or over-collateralized debt obligations such as DAI, USDe is backed through a mechanism that issues it at a 1:1 against spot ETH and liquid staked ETH (stETH). This unique mechanism hedges long exposure to ETH and stETH through short positions in the perpetual futures markets, effectively establishing a delta-neutral position.
This mechanism enables the token to accumulate a yield derived from the native ETH staking yield, as well as funding, or basis, generated from the short perpetual position. This value accrual occurs when staking the USDe, resulting in the holder possessing staked USDe (sUSDe). While the APY on sUSDe is not guaranteed, it has consistently exceeded 20% in the current market, reaching highs of nearly 60%. This risk-adjusted yield has proven appealing to traders, evidenced by the total supply staked surpassing 400 million.
While this protocol has seen success thus far, it has not escaped criticism. Some argue that the yield it offers is unsustainable, along with the turbulence it may be causing in other the on-chain money markets.
002
MakerDAO Raises Stability Fees to Align with Market Rates and Address Volatility Challenges.
Maker governance approved a proposal on March 8th that took effect on March 10th. The new proposal will increase interest rates (Stability Fees) and Effective Dai Savings Rate (EDSR) across the protocol. Stability Fees will increase from 6-7% across all vaults to 15-17%, marking a notable 9-10% increase. Additionally, the EDSR experienced a 10% adjustment, rising to 15%.
The surge in the Dai Savings Rate (DSR) can be mainly attributed to the selling pressure on the token, as evidenced by the total supply decreasing from over $5 billion to under $4.5 billion within a span of 2 days. This trend is also reflected in the DSR balance, which dropped from $1.5 billion to just over $1.1 billion during the same period. Despite DAI being overcollateralized, a portion of the reserves is allocated to less liquid real-world assets. To mitigate the risk of a potential liquidity crunch, the EDSR was increased to all-time highs to incentivize deposits.
The adjustments to stability fees were influenced by multiple factors, notably market volatility, especially in other lending markets. During March, borrowing rates surged across various lending protocols like Aave Ethereum V3. The variable borrow rate for DAI on Aave Ethereum V3 surpassed 20%, even nearing 50% at times. As borrowing rates rose, so did supply rates, creating a discrepancy. This created an arbitrage opportunity for DAI holders to capitalize on by minting DAI on Maker and supplying it to Aave. By elevating the Stability Fee to a competitive standard, it can help ensure the financial stability of the protocol along with helping to fund the recently elevated DSR.
PRODUCT SPOTLIGHT
Over-The-Counter (OTC) Borrowing to Hedge Locked Assets
Product Overview:
This product offering enables counterparties holding locked or illiquid assets to effectively manage risk and secure a sale price before their underlying position unlocks. For instance, if a counterparty has acquired locked assets at price X and seeks to hedge some or all of these assets, they can utilize these locked assets along with additional collateral for an OTC borrowing arrangement at a fixed rate. This arrangement allows them to lock in the current spot price. The hypothetical scenario outlined below provides a visual representation of how this process would operate.
In this case, the counterparty holds assets bought at $75, with a 365-day bullet unlock, and the current spot price is $125. They can use this arrangement to lock in the spot price and any profit or loss, which in this case would be a 52% return, which is a function of the spot price net of the interest paid. Both downside and upside are capped at the spot price during execution. Foregoing such a hedge exposes them to price risk, with unlimited potential gains but also the risk of total loss.
Product Overview:
(+) Hedge Price Exposure
(+) Fixed Rate
(-) Limit upside exposure
(-) Requires additional capital to hedge full amount
Indicative Terms:
Note: Pricing is indicative and subject to change with market conditions. Nothing contained in this document constitutes investment, legal or tax advice. Please consult with your dedicated specialists for more information.
