Weekly Interest Rate Roundup: July 26

COMP recursive lending rate = all-in supply + 3 * (all-in supply - all-in borrow)

Rates ticked slightly higher this week for the first time in a long time. Compound's USDC supply rate moved up 23 bps. This is likely due to the current bullish market narrative regarding the upcoming ETH merge and increased demand for leverage to go levered long the ETH price.

As the story goes, Ethereum's transition from a proof-of-work blockchain to a proof-of-stake blockchain will be an unprecedented catalyst that will ignite a fundamentals-driven rally in crypto prices (or at least the price of ETH). After the merge, ETH stakers will earn the fees generated by economic activity on chain as well as the block rewards that currently go to miners.

The idea is that directing all of this value to token holders will, for the first time in the history of blockchain, mean that Ethereum will achieve something like "profitability" in the traditional sense where the system is earning fees in excess of what it is paying in emissions for securing the chain. I agree that this is really important and a huge step forward for the Ethereum community, but I'm also already long and have very much drank the kool-aid. And I'm just not sure who the merge is going to impress that isn't already long crypto and bought into the vision.

Even if the merge does tip Ethereum into profitability (this is questionable), investors who are inclined to buy on purely dispassionate criteria like revenue-multiples and things like that will still rightly say that ETH is crazy expensive relative to the free cash flow that it generates today.

And so I just don't think that the merge is going to open the investment floodgates - if you buy ETH today it's still because you believe in a long-term, hazy vision of what the future might look like. The merge doesn't change that. So I expect this to be a buy the rumor, sell the fact type trade. Not that I ever sell crypto though. I'm bid only.

Teddy