8 [AAVE] BTC Funding Rates

    db_img

    What is AAVE?

    Aave is a decentralized money market that enables users to lend and borrow a range of crypto assets. Aave distinguishes itself by the range of cryptocurrencies in which users can take out loans, and by letting lenders earn passive income on the funds they make available for borrowers. Aave is a system of smart contracts that enables these assets to be managed by a distributed network of computers running its software. This means Aave users do not need to trust a particular institution or person to manage their funds. They need only trust that its code will execute as written. At its core, the Aave software enables the creation of lending pools that enable users to lend or borrow different cryptocurrencies including ETH, USDC, USDT, BAT and MANA. Like other decentralized lending systems, Aave borrowers must post collateral before they can borrow. Further, they can only borrow up to the value of the collateral they post. Borrowers receive funds in the form of a special token known as an aToken, which is pegged to the value of another asset. This token is then encoded so lenders receive interest on deposits. A borrower may post collateral in DAI, for example, and borrow in ETH. This allows a borrower to gain exposure to different cryptocurrencies without owning them outright. Aave also introduce additional features, such as flash loans, and other forms of issuing debt and credit that take advantage of the unique design properties of blockchains.

    Uses

    Aave was designed to act as a completely secure and decentralized ecosystem of borrowers and lenders, offering access to users all over the world and allowing lenders to earn passive interest income on assets they contribute to the liquidity pool.

    Beyond its native defi purpose, Aave is open source which expands its functionality by enabling the development of a variety of third party applications on the Ethereum network.

    Analysis

    In this analysis, I‘m looking at the supply and lending rates for various tokens (WBTC, DAI, USDC, WETH, CRV) on AAVE markets. In addition, I will also be looking at the WBTC supplied on the platform and how this might have affected the USDC rates.

    Key Findings

    1. For 3 out of the 5 tokens analyzed (DAI, USDC, WBTC), the supply and borrowing rates have stayed in a very tight range since November 2021.
    2. WETH rates have increased dramatically (2x) since November 2021.
    3. CRV rates after almost 1-yr period of volatility have become stable in June 2022.
    4. Since May 2021, the total WBTC deposited has ranged between 30K and 50K. The supply is currently at the bottom of this range i.e. ~30K.

    Supply and lending rates

    Loading...
    Loading...
    Loading...
    Loading...
    Loading...
    Loading...
    Loading...
    Loading...

    DAI Rates

    1. The rates for DAI showed a lot of volatility back in Jan-May 2021 time period with the borrow rates reaching as high as 40-50%!

      1. The deposit rates peaked at around 14% in this time period.
    2. Since November 2021, the rates have been very stable (even the variable borrow APY).

      1. In this time period, the best deal would have been to choose the variable Borrow rate.
    3. In July 2022, the DAI supply rate has fallen to its lowest level - ~0.5%!

    USDC Rates

    1. Similar to DAI, USDC rates also started with a volatile period and since November 2021 the rates have been very stable.
    2. Like DAI, USDC supply rates are also hit their lowest level in July 2021 - ~0.5%.
    3. For both DAI and USDC, we saw an uptick in borrow rates between the market peak of August and November. This was likely users leveraging by borrowing stablecoins by posting collateral.

    WBTC Rates

    1. The WBTC rates don’t show a volatile period between Jan and May 2021 like DAI and USDC above.

    2. The WBTC rates have remained largely the same since Jan 2021.

      1. The borrow rates have never exceeded ~7% and have largely remained under 5%.
      2. The supply rates have remained negligible around ~0.02%!

    WETH Rates

    1. Like WBTC and unlike the stablecoins (USDC,DAI), WETH didn’t see an increase in borrow rates in the August-October 2021 market peak.

      1. On the contrary, WETH saw the lowest rates during that time-period with supply rates decreasing to ~0.005%!
    2. The rates have started increasing more recently since March 2022 and with the recent bear market intensification, the borrow rates are at their highest (~6%) in the last 12-months. This is likely because of the bearish sentiment and people shorting Ethereum.

    CRV Rates

    1. The CRV token rates are an interesting puzzle to solve.

    2. Between June and July 2021, the rates were very volatile and ranged between 0-50% (all rates).

      1. There was no stable period in the past market peaks and lulls.
    3. However, since June 2022 we’re suddenly seeing the rates become stable with borrow rates hanging around ~6% (variable)/~12% (stable) and ~2% for supply.

    WBTC Analysis

    WBTC Deposits

    1. Since May 2021, the total WBTC deposited has ranged between 30K and 50K. The supply is currently at the bottom of this range i.e. ~30K.
    2. We saw a large uptick in BTC supply around the April-March market crash of 2021. But when the brea market set in in November 2021, we saw a decrease in WBTC supply.
    3. The supply again picked up in March 2022 as the bear market intensified and reached new peak of ~52K WBTC.
    4. After the Terra crash of May 9th, we saw a sharp decline in WBTC supply from 52K to 39K.
    5. The supply reached 48K again but then dropped again to 30K as the Celsius, Voyager, 3AC crypto-contagion set in.

    WBTC vs USDC Rates

    Comparing WBTC makes sense because a common strategy in DeFi is to post WBTC as collateral and borrow USDC to leverage. This is beneficial from tax-standpoint as WBTC is not sold and gains not realized.

    1. We see the first correlation between WBTC supply and USDC rates in May 2021. As the WBTC supply increased, the USDC rates exited a period of massive volatility and became stable.
    2. Next up in September 2021, the supply of WBTC decreased and the USDC rates went up. Around the end of October 2021, the WBTC supply saw a sharp decline of around 2x and the USDC borrow rate spiked to 30%+!
    3. As WBTC supply has reached new peaks since April 2022, USDC rates have started to decrease to their lowest levels.

    USDC utilization rate

    1. Another way to look at the relationship between these two tokens is to look at the USDC utilization rate (Amount borrowed / Amount supplied).
    2. We can see that the initial increase in WBTC supply in June 2021, caused a dip in USDC utilization rate before the rate went back up to nearly 90% in August 2021.
    3. As the bear market has deepened since Jan 2022, we’ve seen the USDC utilization rate decrease to its lowest levels around 40%.
    4. As the rate is already lower than optimal max (80%). As the rate is lower and the supply of WBTC has increased in 2022, the overall lending and borrowing rates have decreased.
    db_img
    db_img
    db_img
    db_img
    db_img