Price Action Triggers Liquidation Cascade, Slashing Funding Rates and Wiping Out Open Interest
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In this report:
Volatility Triggers Liquidation Cascade, Slashes Funding Rates, and Resets Leverage
On-Chain Rates Drop as Price Action Weakens and Funding Resets
Ethena Yields Cooling Off Compared to December Levels
Market Update
January proved to be a turbulent month for crypto, with BTC swinging between the 90k and 109k range. This volatility weighed on the broader market, particularly affecting Ethereum and altcoins. Funding rates for BTC, Ethereum (ETH), and SOL normalized from December’s highs and ended the month in negative territory. These funding rates, which reflect the level and direction of leverage, indicate that traders were reluctant to hold leveraged positions and were predominantly short by month’s end. The decline in leverage demand has contributed to lower cash rates across the market.
As the month came to a close, a sharp price drop triggered a wave of liquidations, particularly in Ethereum, which briefly fell below $2,200 before rebounding back above $2,700.
This dip triggered over $1 billion in long liquidations across the market. Liquidations effectively remove leverage from the system, resetting it to a more balanced and neutral level.
Ethereum's open interest dropped sharply from nearly $5 billion to under $4 billion in just a few days.
Overall, this widespread liquidation has resulted in a reset of market leverage and a decline in cash rates.
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Key Trends...
On-Chain Rates Drop as Price Action Weakens and Funding Resets
Similarly to the perp markets, the demand for on chain leverage continues to falter as price action weakens. The Total Borrows of USDC on Aave Ethereum V3 has declined during the month of January whereas as the Total Supply has increased indicating the traders would rather earn a yield on idle stablecoins rather than leverage their holdings.
The Available Liquidity of USDC has increased from under $400mm to just under $1b, an increase of around $600mm during the month.
The excess supply has pushed borrow rates from nearly 12% to start the month to just over 8% to close it. The Utilization Rate has decreased from around 80% to under 65%.
Ethena Yields Cooling Off Compared to December Levels
Ethena, a leading synthetic dollar protocol, is well-known for generating attractive yields on its savings asset, sUSDe. However, those yields saw a decline throughout January.
In December, the protocol's total value locked (TVL) surged to an all-time high of nearly $4 billion, driven by a spike in yields that reached close to 30% amid strong bullish price action.
The yield on sUSDe is derived from a combination of factors: staking rewards from the asset that minted the token, stablecoin rewards, and short positions in the futures contracts of the same asset, typically collecting funding rates in the process.
As funding rates have decreased, so too has the yield on sUSDe. This trend is evident as overall funding rates across the market dropped, causing sUSDe's yield to fall to just above 10% by the end of the month, in the wake of this TVL remained relatively stable.
Notable News
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Trump's new meme coin soars on his first day in office, lifts other tokens
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