Weekly Interest Rate Roundup: May 24

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

Well, it's been a slow week. Rates are low, but that's nothing new. With rates in TradFi set to rise significantly above the rates on Compound and Aave, I don't think things can continue like this for too much longer. There's only two ways rates go up - either more people borrow or fewer people lend. I don't think we're going back to a bull market any time soon, so I would put my money on people pulling their stablecoins off of Compound and Aave in favor of other opportunities.

First, let's understand a few things about who lends to Compound and Aave. The deposit bases of both of those protocols (and most other protocols in DeFi) is skewed heavily toward large dollar value users. These tend to be funds, DAOs, protocols, and the infamous "crypto whales".

Most of these users are pretty professional - funds, DAOs, and protocols will all notice that they aren't earning the same yield they used to be earning. I think you can count on these kinds of users moving off Compound and Aave over time if the yields stay this low persistently.

DAOs and protocols make interesting case studies because in general their operations are at least relatively public - you can see what they are doing and why. From what I've seen on different governance forums, a lot of DAOs and protocols who are using Compound and Aave to generate yield on stablecoins are now in various points of finding alternative solutions. These kinds of players are generally slow to act, but I think over the next six months you will see a movement of funds away from these two money markets.

Crypto whales are the real wild card here. As anyone who has launched a version of their protocol that requires a liquidity migration will know, a lot of crypto users can be surprisingly slow to move their capital from an unproductive place to a productive one - even if that capital is in the millions! But idiosyncratic crypto whales not withstanding, I do anticipate a general withdrawal of liquidity from Compound and Aave over the next six months or so if we really do settle into a crypto winter.

To be clear, I don't think that a liquidity withdrawal will be specific to Compound and Aave. I think it's possible that the amount of organic yield opportunities currently available in DeFi do not justify the amount of stablecoin liquidity in the system. And short of one-off factors like people being unwilling to take their stablecoins out of DeFi for fear of doxxing themselves and being forced to pay taxes that they've evaded, I think the general trend will be lower overall liquidity levels in DeFi.

Teddy