March 11, 2024: The Bull Switchđđ
DeFi, $crvUSD, react to the marketâs abrupt bullish turn
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The Bull Switch
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Remember the bear market?
It feels as if sometime around January, somebody (presumably the Bitcoin ETF crowd) simply flipped a switch, and everything abruptly turned bullish. In our binary world, thereâs apparently no daylight between bull and bearâŚ
We know the biggest thing about this bull market is that interest in Bitcoin and Ethereum is ravenous. For evidence, one need look no farther than Ethena, which brings the funding rate onchain in the form of âstablecoinâ yield.
At present, Ethenaâs APY has hit a whopping 67%!
If you want a more âconservativeâ strategy, study the DSR ($DAI Savings Rate). Recently this moved from 5%, roughly what you can get from banks nowadays, up to 15%.
For today, weâll table the questions about the source of this 15%âŚ
Yes, they also raised borrow rates to 15% to match, but thereâs a potential mismatch between the amount of borrowed assets backing DAI relative to the amount of DAI backed by RWA, which earns 5%.
But we digress, this is not a âMaker Capâ blog. The important thing is the repercussions across crypto for a DSR hard-coded to 15%.
The DSR is considered something like the ârisk-freeâ rate in DeFi, (knowing of course that there is no such thing as risk-free in the perilous world of crypto). The entirety of DeFi, whether governed by multisig or the market, effectively adjusts to this rate. If your stablecoin is not shedding at least 15% yield, then why not move it to a âblue chipâ stablecoin that does?
In this max-greed environment, the heavy demand for stablecoin is not overly influenced by demand to simply park money and earn 15%. The most significant demand on the market is to leverage trade BTC/ETH.
Of course, the effect weâre watching most intently is $crvUSD. As demand for leverage is becoming unhinged, the rates for $crvUSD borrowing are going through the roof.
Anybody still groggily recuperating from a bear market hangover might not believe it, but borrow rates are pushing towards TRIPLE DIGITS!
The elevated rates are of course squeezing out boring fuddy-duddies who want to mint $crvUSD and simply farm the 15% yield on stablecoins⌠thatâs guaranteed to lose money. But such cautious strategies are simply drowned out by the demand for leverage. Apparently, borrowers really are willing to place a premium on the protection provided by soft liquidation.
You can see the query being periodically updated in the Curve social channel by cryptoharry, treasury manager at Inverse Finance. Itâs showing off the numbers that are causing $CRV fans to embrace a high rate environment that might otherwise be thought of as price gouging.
For however long this storm lasts, $CRV is printing over $1MM in revenue every week. All of which of course, unlike rival protocols, goes directly to the pockets of veCRV holders.
The $crvUSD rates being dynamic means that the DAO doesnât directly control rates, but the DAO does have control over a handful of parameters it can use to nudge behaviors based on observational data.
This past week the âsigmaâ parameter was adjusted to make borrow rates even more reflexive to changes in the peg. The priority for $crvUSD has always been to protect the peg at all costs, and from this point of view weâre currently seeing demand for leverage trading put the stablecoin through perhaps its most significant stress test everâŚ
We also see active voting on another tweak to adjust for the high gas fee conditions being driven by the insane bull marketâŚ
Remarkably, we may also see even more wild leverage coming up soonâŚ
One final phenomenon to squeeze in as we consider the effects of jolting rapidly from a bear market to a bull market. $CRV locking has all but disappeared, turning negative for the first time in historyâŚ
A heavy portion of Curve locks come from users moving $CRV to wrapped $CRV that locks on their behalf. However, since February the action has mostly been in reverse, users fleeing wrappers for raw $CRV, causing a depeg in all major wrappers
For its part, Yearn is launching new yLockers, which weâre keeping a close eye on.
Weâre not wise enough to know what the depeg in $CRV wrappers means, but other gigabrains are publicly discussing their trading strategies around $CRVâŚ
For our sake, we are making moves to adjust to the turbo-bullish market.