Decentralized finance lending markets experienced negative borrow rates and sharp year-end deleveraging as incentive programs reshaped borrowing economics.
Morpho protocol's Katana chain offered borrowers effective rates of negative 1.5% on vbETH and negative 1.15% on vbWBTC in early January.
Kamino's USDC Prime vault saw supply APY plunge from 6.5% to below 4% on December 31 as approximately $75 million in leverage unwound.
What Happened
Morpho's cross-chain lending markets showed divergent borrowing costs, with Ethereum mainnet rates substantially higher than alternative chains.
Katana borrow markets remain incentivized through KAT token rewards, though the token currently lacks tradability.
Bitget's late-December On-Chain Earn launch drove liquidity into Arbitrum's SyrupUSDC/USDT market, compressing rates to approximately 1.1% versus 4% on mainnet.
The December 31 rate compression on Kamino reflected tax calendar resets encouraging portfolio rebalancing and leverage reduction ahead of year-end.
Utilization in Kamino's USDC Prime vault fell roughly 13% within hours as positions closed before the calendar reset.
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Why It Matters
The dynamics highlight how protocol incentives can invert traditional lending economics, with borrowers receiving net payments rather than paying interest.
Year-end APY dislocations demonstrate predictable seasonal patterns driven by tax optimization rather than fundamental market changes.
Leverage typically rebuilds in early January after year-end rebalancing, creating temporary opportunities for cheaper debt during transitional periods.
The rate divergences across chains underscore liquidity fragmentation and the impact of isolated incentive programs on borrowing costs.
However, the sustainability of negative rates depends entirely on continued protocol subsidies rather than organic market dynamics.
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