Falling ratesBTCAndEtled to investors withdrawing from projects in the regionDeFimore than $50 billion. Dmitry Volkov, technical director of the international crypto exchange CEX.IO, commented on the current situation forForbes.
</em>Interest rates for a specific currency depend ondemand for loans in this currency. Often borrowed funds are used by traders to create leverage for margin trading. It is this type of transaction that accounts for a significant share of the demand for lending on the crypto market.
When the price of cryptocurrency (BTC, ETH) is constantis growing in relation to fiat currency (the dollar and stablecoins pegged to the dollar), many people want to make money on such an upward price movement. And to increase profitability, players often use leverage trading. In this case, leverage can be created using loans. To do this, you need to borrow dollars (or a stablecoin pegged to the dollar) and buy cryptocurrency with them. Therefore, during the period of an upward trend and belief in its continuation, rates on loans in dollars in the crypto industry are growing. A decrease in such rates indicates a decrease in demand for dollar loans and may indicate the end of the upward trend.
Likewise, if there is a community belief indowntrend, then you can also make money on this by taking a short position with leverage. To do this, you need to borrow cryptocurrency, sell it on the market and later buy it cheaper, which increases the demand for loans in cryptocurrency (BTC, ETH). This is confirmed by historical data. For example, a month ago (May 23), rates on Compound on BTC were 0.1%, on ETH - 0.07%. Now they are almost 2-3 times higher: 0.382% and 0.136%, respectively. This indirectly confirms the fact that now market participants tend to believe in a downward trend in the crypto market.
There is also demand for lending in stablecoinsincreased new DeFi projects, in which it was often possible to make money on arbitrage. However, this type of transaction required very large sums in the short term. Funds could be borrowed from DeFi lending services, and arbitrageurs often did not care about the price of such loans. This pushed rates up. At the moment, there are significantly fewer arbitrage opportunities and, accordingly, the need to take out large amounts on credit at high rates has decreased.
Gradual reduction in rates, falling pricescryptocurrencies and the community's belief in a downward trend have led to capital outflows from Compound: in dollar terms, TVL (Total Value Locked) has fallen since mid-May from about $12 billion to $6 billion now. In ETH terms, TVL fell from 1.5 million ETH to 1.1 million ETH. Although there is now an outflow of capital from Compound, at the moment there is no reason to believe that this can harm the industry as a whole, since the outflow is happening smoothly and there are still a lot of funds left in the system, which are sufficient in reserve for stable operation.
Such drops in rates happened quite often inpast, this is a normal reaction of market participants. The lending market is reacting to the price of cryptocurrency, and with an active bullish trend, rates on dollar stablecoins will again become high.
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