Morpho's CirBTC Borrowing Surges to $190M Amidst USDC Liquidity Crunch

Institutions are demonstrating a strong appetite for borrowing against their Bitcoin holdings without resorting to sales, evidenced by the rapid depletion of available funds in a dedicated lending pool.

High Demand for Bitcoin-Backed Borrowing

The primary cirBTC/USDC market on Morpho has seen its USDC supply borrowed to an astonishing 97.4% utilization. This figure represents a dramatic surge from the 8.1% utilization recorded when Circle Mint opened access to the market on September 21. Within just three weeks, the lending pool is nearly exhausted.

As of October 13, the flagship cirBTC/USDC market on Circle’s Arc Layer-1 platform held $195 million in supplied USDC, with $190 million already borrowed.

Circle introduced cirBTC on September 21 as a token pegged 1:1 to Bitcoin. This token is central to Circle’s Digital Asset-Backed Borrowing (DABB) product.

How DABB Works

Eligible institutional clients using Circle Mint can deposit cirBTC as collateral. In return, they can borrow USDC, which is directly credited to their Mint balances. These lending activities are facilitated through Morpho markets, operating on both the Arc and Ethereum networks.

The availability of collateral is not the limiting factor; over $304 million in cirBTC currently underpins these borrowing operations. The constraint lies with the supply of dollars available for lending.

Market Strain Extends Beyond Main Market

This liquidity crunch is not confined to the main market. Smaller, individual cirBTC/USDC markets on Arc have also reported utilization rates approaching 100%.

Circle has maintained a deliberate distance from direct lending activities, neither underwriting loans nor acting as a lender within this structure.

Custodial Role and Reserve Verification

The company’s function is custodial, managed through Circle National Trust. To ensure transparency, proof of reserves is published on-chain via Chainlink, allowing anyone to verify the existence of the Bitcoin backing cirBTC.

Morpho is responsible for setting and managing market parameters, including a liquidation loan-to-value (LLTV) ratio of 86%.

Borrowing Costs and Expansion

Borrowing costs have remained relatively low, with variable rates in the market hovering around 2.8% to 2.9% APY, and the current borrow rate standing near 2.89%.

In early October, Circle expanded borrowing options for institutional clients by integrating with Aave, providing a second platform for borrowing against cirBTC.

Demand Outstrips Supply

Utilization rates, which measure the proportion of a lending pool actively lent out, highlight the imbalance. The rapid increase from 8.1% to 97.4% in approximately three weeks indicates that demand significantly outpaced supply, with borrowers entering the market at a faster pace than lenders.

For borrowers, the product appears to be functioning as intended, offering attractive rates and seamless integration with Circle Mint. However, with only about $5 million in available funds remaining in the main market, subsequent large borrowers may encounter a scarcity of liquidity.

The participants in this market are identified as institutional Circle Mint clients, not anonymous entities. They are leveraging decentralized finance (DeFi) protocols for these transactions.

Circle continues to operate as a custodian and stablecoin issuer, while Morpho manages the risk engine and Chainlink verifies the reserves.

Circle’s Strategic Benefits

For Circle, this product incentivizes Bitcoin holders to engage with its ecosystem and simultaneously stimulates demand for its USDC stablecoin, as every dollar borrowed represents an increase in USDC in circulation.

Furthermore, it provides Circle’s native Layer-1 blockchain, Arc, with a tangible use case early in its development, as both the main and smaller markets are hosted on Arc.

Potential Risks

The inherent risks are typical for such markets but are amplified by the concentration of liquidity. An 86% LLTV ratio provides some buffer, but a substantial decline in Bitcoin’s price could trigger liquidations. In a scenario where nearly all available cash has been lent out, a simultaneous occurrence of liquidations and withdrawals could place significant stress on the system, a situation a less utilized pool would be better equipped to handle.