Institutional Flows and Yield Strategies Drive Crypto Market Maturation
This post is part of Galaxy Lending’s Monthly Market Commentary, offering insights into trends shaping the crypto credit and lending landscape. Subscribe to receive this commentary and more exclusive content directly to your inbox.
In this report:
ETH Borrowing Spike, Liquid Staking Token Depegs & Exit Queue Pressure
Yield Pressure & Speculative Demand Revive Crypto Lending Markets
JPMorgan’s Strategic U-Turn; Exploring Direct Crypto‑Backed Loans
Market Update
The central theme of July was the growing sophistication of Digital Asset Treasury Strategies (DATS), as institutional demand accelerated and reshaped market dynamics. During periods of sharp price movement, cash became constrained—yet unlike previous stress episodes, the spot–futures basis remained relatively stable. Instead of dislocating, BTC and ETH basis markets widened in a more orderly and controlled manner. BTC’s 3-month annualized basis rose from around 4% in late June to nearly 10% by early August, before easing back toward 5%. This move reflected increased appetite for leverage against a backdrop of tight dollar liquidity, reduced elasticity in funding markets, and limited capital responsiveness from the sidelines.
Bitcoin rallied to a new all-time high of approximately $123,000 in mid-July, while Ethereum posted a ~55% monthly gain—marking one of its strongest performances in recent years. The rally was supported by macro and regulatory tailwinds, including the passage of the GENIUS Act and the SEC’s approval of in-kind creations and redemptions for spot crypto ETFs.
Despite these outsized moves, BTC’s volatility declined. Its 90-day realized volatility dropped below that of the Nasdaq 100, a notable signal of increasing market maturity. Meanwhile, funding rates on altcoin perpetuals ticked higher, signaling aggressive long positioning and persistent dollar scarcity. This tightness in cash—rather than BTC—was the key constraint across lending markets.
Institutional ETH basis trades surged in July, with hedge funds building $1.73B in short ETH futures on CME while pouring billions into spot ETH ETFs. This strategy aimed to capture an ~9.5% annualized yield from the basis, with some funds opting for spot ETH staking to earn an extra ~3.5%, boosting total returns. These flows highlight the growing use of structured yield strategies by sophisticated players.
The market also absorbed a large OTC sale of roughly 80,000 BTC (worth ~$9 billion) with minimal disruption. This further confirmed the growing resilience of crypto market depth. While funding markets showed signs of strain—through tighter liquidity and wider basis—the absence of disorderly price action, combined with steadily rising prices and falling volatility, highlighted just how far the crypto credit environment has matured. The market not only withstood structural pressure, it rallied through it.
Key Trends:
001
ETH Borrowing Spike Triggers Liquid Staking Token (LST) Depegs and Exit Queue Pressure
In mid-July, Ethereum lending markets experienced a sharp deleveraging event triggered by a spike in ETH borrow rates. On Aave, ETH borrow rates surged to nearly 18%, significantly outpacing staking yields and rendering popular looped staking strategies— where users borrow ETH against LSTs, restake the borrowed ETH to mint more LSTs, and repeat to amplify yield—economically unviable.
This sudden rate dislocation appears to have been driven by an increased exit queue and a large ETH withdrawal by a single wallet, which drained liquidity and tightened borrow supply. As the spread between borrow and staking yields turned negative, traders rapidly unwound leveraged positions, triggering widespread selling of LSTs and additional unstaking of ETH and LSTs.
This wave of deleveraging led to LSTs like stETH depegging to ~0.985, while Ethereum’s validator exit queue swelled overnight—from roughly 350,000 ETH to approximately 744,000 ETH by July 26, its highest point in history. Wait times extended to over 12 days, with estimates peaking at nearly 19 days before the queue began to ease, as the network struggled to process the surge in exits.
Though some of the exits likely reflected profit-taking at local highs, other motivations included ETH inventory reorganizations by Treasury-aligned public companies and the unwind of looped staking positions in response to collapsing staking-borrow spreads.
The congestion of the exit queue created its own feedback loop: as staked ETH became more illiquid, users seeking ETH exposure or liquidity turned to lending protocols or centralized lenders to borrow liquid ETH, driving up borrow demand even further. This exacerbated the spike in rates and added additional strain on protocols’ liquidity.
This episode underscored the inherent fragility of current staking and restaking models, particularly in times of stress—highlighting the urgent need for more robust and flexible liquidity solutions in the market. Innovations such as collateralized credit lines backed by staked assets, programmable redemption queues, or liquidity vaults may offer paths toward greater resilience. This highlights a key limitation for crypto-native treasuries when staking liquid ETH balances, given the uncertainty around potential asset-liability mismatches.
002
Yield Pressure and Speculative Demand Revive Crypto Lending Markets
July marked a decisive return of risk-on behavior across crypto DeFi lending markets, driven by elevated borrowing demand, attractive yield farming rewards, and a tightening supply of passive capital. The search for higher yields accelerated across multiple chains and protocols. In the Hyperliquid L1 ecosystem, borrowing demand for HYPE spiked as traders pursued directional exposure, with rates on protocols like Hyperlend peaking at 13.1% and HypurrFi averaging 6.1%—far exceeding the ~2.2% available via native HYPE staking, according to Staking Rewards. This rate differential reflects aggressive positioning and a willingness to pay a premium to access liquidity in emerging assets.
In parallel, SPK Farm on Spark offered a simplified and attractive yield farming opportunity: users could supply USDC and earn SPK tokens with no lockups or strategic complexity. APYs on the farm peaked above 17% and remained elevated throughout the month, positioning the farm as a competitive destination for stablecoin capital — with total value locked (TVL) reaching around $1.3 billion — and adding pressure on traditional lending markets to maintain attractive returns.
Meanwhile, on Base, Coinbase’s rollout of retail borrowing functionality contributed to a surge in stablecoin lending rates. Customers can post BTC and borrow USDC on Coinbase app. On Morpho’s cbBTC/USDC vault, APYs climbed from 5.5% to 8.1% over the month, as new retail inflows tightened available liquidity.
These behaviors mirrored broader sector dynamics: total DeFi TVL hit a three-year high, crossing $153 billion, driven in large part by ETH’s price rally, alongside the growing use of leverage, restaking loops, and advanced capital efficiency strategies. While yield farming and speculative flows added momentum, the structural expansion in ETH valuations acted as the foundational lift. Lending protocols like Aave benefitted from the uptick, with fee revenue rising over 200% in just three months, breaching $3 million daily at its peak — a clear sign of reinvigorated borrowing activity and leveraged exposure.
Collectively, July’s activity signals a clear capital rotation: away from passive, long-duration staking and toward composable, high-velocity, and incentive-driven DeFi lending strategies. With both retail and speculative capital re-engaging, the crypto lending sector appears firmly back in growth mode.
003
JPMorgan’s Strategic U-Turn — Exploring Direct Crypto‑Backed Loans
In July, JPMorgan signaled a major shift by exploring a new lending product that would allow clients to borrow against their cryptocurrency holdings—specifically Bitcoin and Ethereum. This would expand upon the bank’s current offering that supports loans collateralized by crypto ETFs, and marks one of the first forays by a major U.S. bank into direct crypto-backed credit. While JPMorgan has made clear it won’t hold digital assets on its own balance sheet, it plans to rely on external custody solutions to manage collateral and address defaults. This move has demonstrates increasing institutional acceptance of digital assets as legitimate collateral. It may also intensify pressure on both CeFi and DeFi lenders to raise operational standards, introduce stronger risk controls, and prepare for a more competitive, regulated borrowing environment.
More from Galaxy:
Insight: Weekly Top Stories - BTC Hits ATHs; ETH Stages Comeback
Trading Takes: ETH ETF Flows, Treasury Buys, and the Crypto Rally
Podcast: Future of Blockchain Infrastructure with Zane Glauber and Harry Austin
Notable News:
Ether Sees Record Short Build up as Hedge Funds Pile on Basis Trade
JPMorgan considers offering loans backed by clients' cryptocurrency holdings
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