Bitcoin has no inherent interest rate or yield. Due to its fixed and known inflation rate and the degree to which it captured the mind of a generation of internet users, Bitcoin underwent four fantastic bull markets from 2009-2021 without needing to promise an apy or investment return to holders. In fact, Bitcoin borrowing (and thus the idea of a Bitcoin interest rate) was always a bit inappropriate. Firstly, price increased dramatically, raising the question of why a borrower would even want a liability denominated in Bitcoin. Secondly, there was no real circular economy that used BTC as a currency following the collapse of Silk Road (and its clones) and subsequent dominance of XMR in clandestine transactions.
Given this, there has always been a much greater supply of BTC willing to be lent out than there has ever been any demand for BTC to be borrowed. BTC is a desirable investment vehicle and is liquid collateral, so people do not need to be encouraged by high interest rates to choose to save in it, as is the case with USD. The only real borrowers of BTC meanwhile are shortsellers.
Given this, it is dificult to guess what interest rates should look like in crypto. What should be a natural rate of interest? How volatile will rates be over time?
As we can see, the supply interest rates for both BTC and Ethereum are extremely low, with the lone exception of when the Ether borrow rate priced in the PoW fork before the merge (borrowers would be “paid” a PoW airdrop, causing loan demand to briefly eclipse supply). The borrow rate is much higher than the supply rate in both cases. Interest rates appear to be volatile, but more so for Ether. This may be because Ether holders can “stake” or vest tokens for fixed-income like returns, which may make the supply side tighter than BTC.
In both cases, but especially BTC, it is not clear why anyone would supply to AAVE for such paltry interest rates, as one has to take on custodial risk in the form of wrapping BTC to even have the privilege of depositing to AAVE (yay more smart contract risk) for 0.10% interest. Of course, the answer is simply that the real reason this BTC is there is likely to borrow USDC for various reasons. They may be borrowing the money to simply relend it out somewhere else. Otherwise, the BTC holders may be avoiding capital gains by taking out stablecoin loans instead of selling, or using the borrowed money to go margin long crypto. In any case, we can clearly see that BTC is not used to be lent out but rather to be borrowed against. There is typically no real borrow side for Crypto assets, only entities looking to relend. This appears bad at first sight, but is simply a product of BTC and Ether being desirable assets to hold. Ethers temporarily high mostly risk free staking rates are likely an abberation of history that will collapse to near zero as more and more entities lock their assets up (though this would still lead to nearly 4% interest rates if I remember correctly… Ether’s staking rewards may be too high and rewarding for users at the cost of the application layer).
This has practical implications for lending protocol design, because most of the tokens and crypto assets listed on the market are there *solely as collateral*. They are not really there because someone wants to borrow the asset. Compound V3 is designed specifically for this dynamic, wherein crypto assets are merely collateral against which the “base asset” or USDC is lent, as the USDC is seeking a return and the Crypto collateral is seeking, well, some extra liquidity for degening and avoiding capital gains.