Ethena bringing CEX funding rates onchain in tokenized form (sUSDe) is having massive ripple effects across DeFi

Right now, Maker, Aave, and others are reacting by raising their borrow costs and the native yield they pay holders

But we're about to enter Act II... 🧵

Stablecoin issuers like Maker, Aave, and Liquity don't need to raise the rates they pay their holders directly

They can at least partially rely on the trust they've built in their systems over years

That trust premium will allow them to maintain slight lower rates for now

What tools do we have? Lending markets!

Aave can onboard sUSDe as collateral and Maker can offer it as a vault

In Aave's case, if they add it as full collateral in their main pool, it may pull up borrowing costs across the board, so an isolated market may make sense

But guess what? 

There are other lending protocols out there that are PERFECT for isolated lending markets, namely Ajna and Morpho

And being permissionless, Ajna got an sUSDe/DAI lending market live Day 1!

But guess what? 

There are other lending protocols out there that are PERFECT for isolated lending markets, namely Ajna and Morpho

And being permissionless, Ajna got an sUSDe/DAI lending market live Day 1!

https://twitter.com/delitzer/status/1759621602432766107

You can see here how the rate paid to DAI depositors has naturally been growing and is already over 20% APY

Look at how nicely that's been climbing!

Right now, all the liquidity is concentrated in a single bucket, resulting in 99% utilization at a similarly high collateral factor.

But if depositors wanted to reduce their risk and demand more collateral per DAI borrowed, it seems likely sUSDe depositors would still be happy.

And just wait until @morpho gets going with Morpho Blue and some MetaMorpho vaults for DAI deposits and sUSDe collateral! Anyone can do it, but there are probably some experienced risk managers already working on this...

Over time, I would expect significant adoption of these isolated lending markets with lots of looped borrowing, bringing the rates paid to DAI, GHO, or LUSD depositors in such pools much closer to the sUSDe yield rates

This isn't without risk though!

When funding rates on CEXs start coming down from their dizzying heights, there's going to be unwinding across the board

This is likely to create a stress test on these markets and supplies of stablecoins that were being deposited in them

The tighter linkage sUSDe creates between demand for leverage on CEXs and rates across DeFi is incredibly powerful and represents a major inflection point in the industry

Along with the BTC ETFs (hopefully followed soon by ETH ETFs), we're entering a significant new phase

I'm excited about where we're heading and think we should both celebrate and continue to explore and push at the edges

But let's make sure we continue to have open conversations about the new risks and heightened stakes

🫡

A 40-50 point APY difference is too much though

One way this closes is that CEX lending rates seem unlikely to persist at these levels for long (it is hard to fade the ETF inflows though...)

But this is DeFi! We have our own tools...