Incentives are creating arbitrage opportunities that push DeFi borrowing costs into negative territory. The Morpho protocol’s Katana chain posted real borrow rates of -1.5% for vbETH and -1.15% for vbWBTC in early January, illustrating how cross-chain dynamics are bending loan economics. Across chains, borrowing costs diverged, with some networks offering markedly cheaper debt than Ethereum mainnet. Katana’s borrow market continues to reward with KAT tokens, though the token remains non-tradable.
Kamino’s USDC Prime vault saw leverage unwind of about $75 million, driving the December 31 supply APY from 6.5% to under 4%. This rate compression reflected year-end tax resets and portfolio rebalancing as investors trimmed leverage. The utilization of Kamino USDC Prime vault fell by roughly 13 percentage points just before the calendar reset. The broader trend shows protocol incentives can invert traditional lending economics, letting borrowers earn net profits instead of paying interest.
End-year APY distortions appear to be seasonal, tied to tax optimization rather than fundamental market shifts. Leverage tends to rebuild in January after year-end rebalancing, creating a window for temporarily cheaper debt, while cross-chain rate differentials highlight liquidity fragmentation and the effects of individual incentive programs. The sustainability of negative rates will depend on continued protocol subsidies.
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