Borrowing USDC Is Very Expensive On Aave And Compound, What’s Going On?

Borrowing rates for USDC, one of the most liquid dollar-pegged stablecoin, remain high on Aave and Compound v2, two of the world’s top decentralized protocols. According to Kaiko, a blockchain analytics platform, rates have ranged from 4% to 15% on Aave and around 13% on Compound.

It should be noted that this surge is when the crypto and decentralized finance (DeFi) scene is recovering after an extended “winter” that froze participation.

USDC borrowing rates on Aave and Compound | Source: Kaiko on X
USDC borrowing rates on Aave and Compound | Source: Kaiko on X

Borrowing USDC on Aave and Compound Is Expensive

Kaiko notes that the utilization rate for USDC on Aave has remained close to optimal levels, indicating steady demand for the stablecoin among borrowers, mainly in the second half of November. Looking at trends, it is evident that borrowing rates in Aave v2 have been stabilizing between 4% and 15% over the past week.

AAVE prices trending sideways on the daily chart as USDC borrowing rate spikes | Source: AAVEUSDT on Binance, TradingView
AAVE prices trending sideways on the daily chart | Source: AAVEUSDT on Binance, TradingView

Meanwhile, on Compound v2, borrowing USDC has been more expensive than others, including USDT and DAI. The USDC borrowing rate is around 13%, much higher than borrowing Ethereum-based DAI or Tether Holding’s USDT.

There is no precise reason to explain this divergence. However, the reason why demand is varying could be multifaceted. One of the key reasons is that after depressed activity in the better part of 2022 and 2023, activity is expanding as total value locked (TVL) not only in Ethereum but in other chains, including Solana, shows.

DeFiLlama says the total TVL is around $47 billion, up from approximately $38 billion registered in mid-October. Subsequently, with rising demand, USDC holders will likely want more yield from willing borrowers. 

DeFi TVL rising | Source: DeFiLlama
DeFi TVL rising | Source: DeFiLlama

Beyond this, increasing borrowing rates could be due to users averse to using centralized exchanges opting to secure a stablecoin that’s fully audited, publishing attestation statements regularly.

In the case of USDC, these attestations are independent audits that verify whether Circle, the issuer, holds sufficient reserves to back every token in circulation.

Are Bulls Ready To Lift Crypto Prices Higher?

While the high borrowing rates for USDC may make it less attractive for some borrowers, it also highlights the strong demand for stablecoins and their growing importance in DeFi. In the crypto market, the demand for stablecoins, such as USDC, can indicate the start of a bull run. 

Stablecoins provide a gateway into crypto. When there is a higher demand for these tokens, the chances of the crypto market rising also increase. As the crypto and DeFi scene matures, stablecoins like DAI and USDT are expected to play a critical role.

Feature image from Canva, chart from TradingView

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