Yield Compression Continues as More Money Seeks Yield while Avoiding Capitulation


Activity in the crypto market and DeFi has taken a hit as prices either dump or trade sideways. When it comes to the Ethereum network, gas prices have fallen to early DeFi summer levels, a mere 10 gwie which skyrocketed to 2,000 gwei for a brief period in May.

Amidst this, the total stablecoin supply has reached nearly $108 billion, adding more than $47 billion in just the last three months. trader CL of eGirl Capital said,

“The rate of USDC minting concerns me, the more money-seeking yield in crypto, the more alpha decay in futures curve. The pool of yield-seeking money only gets bigger, leverage traders seem to perpetually lose money. 1 day we might never see quarterlies above 20% again.”

While “good for price… it will make speculation way more competitive,” he added.

In the meantime, this growth in stablecoins supply is crypto market participants looking for risk-off yield farming opportunities or even traditional market participants bypassing directly investing in crypto. Glassnode noted,

“Among the bearish sentiment, liquidity remains strong on-chain as core DeFi participants seek out the highest yields in stablecoins, accumulate governance tokens, and continue to hold spot ETH.”

However, yields have already started to contract as demand for leverage slows. With funding on perpetual contracts normalizing and going negative, yield in DeFi is bound to go down even more as well. Meanwhile, the low volatility interest rates have arisen, giving stablecoin farmers and short-sellers access to cheap borrowed capital. Glassnode says,

“As long as liquidity stays strong and demand for borrow lessens, yields will continue to stay low in borrow/lend markets.”

The latest sell-off in the market saw Bitcoin crashing 55% from its all-time high and Ether experiencing a drawdown of over 66%. But while short-term ETH holders see their unrealized gains evaporate as the loss enters the capitulation zone, long-term holds remain firmly in profit.

Unlike previous times of capitulation, this time, these long-term holders have the opportunity to deploy their assets in DeFi. Fiskantes said,

“One of the reasons this down cycle could be shorter than 2018-2020. Money don't have a reason to leave if they can stay in stables -> compressed yields -> higher yield seekers increase risk appetite -> buy pressure for “productive assets.”

As we reported, both the lending protocols Aave and Compound have seen over $4 billion in outstanding deposits.

These protocols allow ETH holders to borrow stablecoins against their deposited crypto asset, which can be used for attractive risk-off yields or speculate on token prices and gain governance tokens, stablecoin balances, and crypto assets by buying the dips, all the while keeping their exposure to ETH.

“Stablecoin yield farmers remain healthy profiteers during downturns,” states Glassnode, noting the competition is waging on in the Curve Finance ecosystem as Yearn, Convex Finance, and Stake DAO compete for deposit dominance.

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