- USD Coin (USDC) Interest Rates Lower Than Four-Week Treasury Bills Amid Crisis
- Despite a bear market, analysts believe that going forward, DeFi rates will approach the line, if not above, of traditional markets
The DeFi space saw a steep decline as the market continued to be battered after the Celsius liquidity crunch and butterfly effect that happened this week. The ability to generate low-risk return in DeFi has plummeted, followed by an outflow of liquidity, hitting stablecoin interest rates in the lending market.
USD Coin (USDC) interest rates on the Aave money market protocol stood at 0.76% and on the compound at 0.24% on Tuesday at 6 a.m. ET – both lower than the last yield of 1.18% on four-week Treasuries – reversing the bull market scene.
“Some people have called it a utopian virtuous circle. Others have simply called it greed,” analyst Ben Giovo wrote in the Bankless newsletter. “The thing is, reflexivity goes into both ways.”
On-chain activity has fallen as prices have fallen, which has made deploying capital in DeFi less attractive as returns are lower, he explained in the post.
In May, the market capitalization of the four major stablecoins fell by nearly $7 billion as investors sought to exchange their tokens for cash. After all, why take the risk of owning stablecoins, if there is nowhere to generate a safe return above the traditionally risk-free rate?
Still, Giovo wasn’t too concerned, saying that “DeFi lenders are crossing paths with meat space companies to get this jack out of the box.”
Dustin Teander, research analyst at Messari, agrees, believing that the lower deposit rates compared to traditional markets are due to a smaller usable market rather than a structural gap in protocols.
“In its current state, DeFi lending activity is largely limited to financing short-term, speculative trade leverage,” he told Blockworks. During a bull market, borrowers were willing to pay for leverage. But now, deleveraging is required.
“While we’ve seen prices fall, demand for leverage and borrowing has come down significantly, ultimately driving down deposit rates in the process.”
Teander believed that in the future, DeFi rates would “approach, if not exceed, traditional markets” alongside the expansion of usable markets. He pointed out that protocols have already built lending businesses that are more integrated with traditional markets, such as MakerDAO’s real-world asset lending and Aave’s Arc protocol.
“Over time, this will open the door for DeFi deposit rates to no longer be solely driven by speculative trade demand and become more trade-driven, as seen in traditional markets,” he said. he declares.
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