The Search for Yield
Sophisticated Strategies Push Loans to New Heights
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This week, we examine the increasing complexity in DeFi strategies as users actively leverage their assets to maximize yields through sophisticated borrowing and staking mechanisms. We assess the effects of these advanced strategies on both individual participants and the broader market landscape.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
- Ethereum fees have reached their highest level since the week of April 18th.
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
- $686 million worth of ETH was withdrawn from exchanges this week.
Leveraging DeFi for Yield
As the cryptocurrency cycle advances, participants actively pursue innovative strategies to enhance the yield on their investments. They often increase their leverage to maximize exposure to market uptrends. Each cycle introduces a new array of compelling and groundbreaking protocols, offering participants fresh avenues for revenue generation through their assets. In the current cycle, we are observing significant momentum and adoption of trends such as liquid restaking and Ethena’s basis trading, underscoring their growing impact on the market.
All time highs — Ethena’s USDe and Ether.fi’s eETH have reached unprecedented levels, with supplies standing at $3.2 billion and $6.4 billion respectively.
- With a supply of 1.7 million eETH, Ether.fi establishes itself as the leading liquid restaking protocol within the Eigenlayer ecosystem.
- EtherFi’s eETH token is designed to provide users with staking rewards for contributing to the security of Ethereum’s network, as well as additional restaking rewards for supporting the security of EigenLayer’s AVS.
- Ethena’s USDe has achieved remarkable success, rapidly ascending to become the fourth largest stablecoin in the cryptocurrency ecosystem.
A reliable method to assess the demand for leverage and market exposure among users is by examining the loans issued by DeFi protocols. This approach helps us understand the extent of users’ market involvement.
$11 Billion in Loans — DeFi users have borrowed in excess of $11 billion, achieving a two-year peak in outstanding loans.
- Aave holds the position as the largest lending protocol in the DeFi sector, with its V3 protocol reaching an all-time high in borrowed funds, nearing the significant milestone of $6 billion.
- The surge in borrowing has also escalated the volume of high-risk loans to a high of $1 billion. These are loans secured against volatile collateral that are within 5% of liquidation threshold.
This demand has primarily been fueled by users looping their positions between liquid staking tokens and liquid restaking tokens, aiming to maximize their rewards creating an ETH leverage staking strategy.
Over $1 billion of weETH is utilized as collateral by users borrowing ETH in Aave’s V3 protocol.
- The collaterals in Aave’s V3 ETH market are predominantly composed of wstETH and weETH.
- Aave V3’s recent inclusion of weETH has been well-received, with an increase in its use as collateral by users since its support commenced in April.
- Similarly, users are not only leveraging their positions with liquid staking tokens but are also borrowing stablecoins to subsequently deposit them into Ethena’s USDe. This strategy capitalizes on the differential between the yield offered by Ethena and the borrowing interest rate they incur.
The increasing utilization of DeFi protocols for leveraging positions and borrowing illustrates a sophisticated engagement with the crypto market by users seeking to maximize yield generation. By employing strategies such as looping liquid staking and restaking tokens, and optimizing the use of stablecoins, participants are enhancing their financial strategies in innovative ways. These practices not only demonstrate the depth of the current market’s capabilities but also suggest a maturing understanding of leverage and reward dynamics within the DeFi ecosystem.
