Event-Driven Borrowing and Volatile Basis Define Lending Flows

In this report:

1. Incentives and Governance Shape Liquidity in Lending Markets

2. Real-World Assets Broaden DeFi Collateral Pools

3. ETH 43 Day Exit Queue, Staking Inflows Sustain the Trend

Market Update

August brought notable shifts across spot and derivatives markets, shaping activity in lending. USDe borrow rates spiked around the launch of ENA DATs as companies accumulated USDe for use in structured DeFi yield strategies. This drove sustained borrowing demand for USDe, with participants seeking to capture ENA-linked yield opportunities on Pendle. Flows mixed institutional treasury allocations and more opportunistic trades. WLFI lending rates also moved higher, driven by unlock-related borrowing demand as traders hedged and positioned around upcoming token supply events.

Derivatives markets added to the volatility picture. BTC CME annualized basis fluctuated between 7% and 9.5%, briefly dipping below 7% before recovering. ETH CME basis was more volatile, falling from ~11% in mid-August to below 5% at the start of September before stabilizing near 7-8%. SOL CME basis showed the widest swings, starting near 14%, spiking above 25% into month-end, then collapsing below 13% before rebounding toward 18-19%. These moves reflected a mix of positioning around DAT events, leverage resets, and broad risk-taking appetite.

For lending desks, the key theme was basis-driven borrow demand layered on top of event-specific flows. ETH outpaced BTC early in the month, but borrow demand was driven primarily by the prolonged unbonding queue, as participants sought liquidity while staked ETH remained locked. SOL's volatility tied to DATs supported borrow demand for hedging and directional trades, while BTC remained comparatively stable but supplied ample liquidity for collateral. The interplay of these forces left August characterized by event-driven borrowing (USDe, WLFI, SOL) and shifting basis spreads across majors, underscoring a market leaning risk-on but prone to sharp resets as leverage built up.

Key Trends:

001
Incentives and Governance Shape Liquidity in Lending Markets

In August, several notable shifts highlighted how liquidity in DeFi is being steered by both incentives and governance. The ArbitrumDAO's approval of a 40 million ARB incentive program (DRIP) aims to channel rewards toward lending and liquidity provision on Arbitrum, signaling how layer-2 ecosystems are competing to anchor capital. On Solana, Jupiter expanded into lending, leveraging its position as the chain's largest trading venue to keep more liquidity circulating within its own ecosystem. Meanwhile, the Stargate acquisition vote showed how governance choices can redirect the flow of cross-chain liquidity: despite a higher rival offer, the community chose to align Stargate back under LayerZero's control, emphasizing structure and integration over headline valuation.

Euler added to this dynamic by introducing zkVerified Lending Vaults on Avalanche, combining roughly $570,000 in launch incentives with privacy- and compliance-focused design, signaling how incentive programs are now being tailored to attract institutional capital into DeFi. In lending markets, the takeaway is that incentives and governance outcomes are directly influencing where deposits concentrate, how cross-chain liquidity is routed, and the infrastructure through which collateral is transferred.

002
Real-World Assets Broaden DeFi Collateral Pools

In August, lending markets continued to expand the scope of what counts as acceptable collateral. These initiatives have started to admit assets such as tokenized U.S. Treasuries, short-term commercial paper, and private credit claims. These instruments are typically brought on-chain by issuers, which wrap traditional debt products into blockchain-based tokens that can be pledged in lending protocols. For borrowers, this means they can secure dollar-linked funding without being entirely dependent on crypto assets. For lenders, it provides access to yield streams tied to conventional markets - for example, government bonds offering around 4-5% annually, or higher-yielding private credit with distinct risk profiles. The broader impact is that DeFi lending is no longer limited to ETH, stablecoins, or governance tokens: it is beginning to incorporate instruments that look more like those in traditional repo and money markets, adding diversification and potential stability to the system.

003
Ethereum Exit Queue Stretched to 43 Days by Kiln, Yet Staking Inflows Sustain the Trend

Through August 2025, Ethereum's staking system came under record exit pressure. The validator queue swelled past 1M ETH (~$4B) by August 28, with average wait times stretching beyond two weeks. Profit-taking at near-record ETH prices, positioning ahead of potential staking ETFs, and liquid staking providers like Lido and Coinbase pulling large blocks of ETH all contributed. The congestion intensified when Kiln initiated exits for ~1.6-1.8M ETH validators after a security incident involving its Solana staking API (used by SwissBorg) led to a major exploit, which alone accounted for the bulk of the queue. By September 9, the unbonding queue had stretched to an extraordinary 43 days, with Kiln making up roughly 70% of pending exits - making it clear that much of the backlog was driven by infrastructure risk management rather than a wholesale investor exodus.

At the same time, the entry queue climbed to two-year highs (~860k ETH, or ~$3.7B), nearly matching the exit side and signaling renewed demand for staking. Outside of Kiln's one-off exit, the "organic" withdrawal queue stabilized around 700k ETH, showing no broader contagion. This matters for lending markets: when ETH is tied up in lengthy exit queues or restaked, circulating supply is effectively reduced, tightening available collateral and potentially impacting borrow rates. Kiln's exits continue to inflate wait times, but underlying demand is rebounding, with entry queues competing with exits and signaling confidence in ETH's long-term yield narrative.

Related Research:

• The State of Crypto Leverage

• The State of Crypto Lending

Notable News:

• Galaxy Leverages Solana DATs to Deepen Institutional Treasury Exposure

• MetaMask mUSD with M0 & Stripe-Bridge for Custom Digital Dollars

• USDH Governance: Community Pushes Back on Stripe-Linked Proposal

• Trimont Taps JPMorgan Blockchain to Accelerate Loan Payment Settlements

• Galaxy Digital Issues Tokenized Shares on Solana, Bridging TradFi & Crypto

• Stripe & Paradigm's Tempo Aims to Make Payments-First Blockchain for Stablecoins

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