Why did Coinbase contribute to an already oversupplied USDC lending pool?

Coinbase announced today that it has contributed $2 million worth of USDC to two decentralized finance (DeFi) lending protocols, Compound and dYdX, as part of its new USDC Bootstrap Fund to support DeFi projects. According to a company blog post, the cryptocurrency exchange addresses the problem of “getting liquidity for a new DeFi protocol.” The bootstrap fund lead Nemil Dalal also told The Block that the fund can attract more borrowers to these lending platforms.

Whether these borrowers will jump onto the bandwagon of DeFi protocols largely depends on the good old economic law of supply and demand. To this end, The Block has compiled loan data from Loanscan.io (Compound, Dharma, Maker Dao, and dYdX) and charted out the supply and demand volumes of USDC and Dai on these platforms. 

Source: The Block, Loanscan

Source: The Block, Loanscan

The graphs show that the supply of USDC has been increasing steadily over the past four months, hitting over $41 million in August. Meanwhile, the demand of USDC in August was only around $12 million, a 38% drop from the previous month. The problem of oversupply is also true with Dai, although the gap is smaller with $39 million in borrowing volume and $51 million in lending supply. 

For any two-sided marketplace, building liquidity is always one of the greatest if not the greatest challenge. Coinbase hopes the injection of 1 million USDC could help to lower the interest rate of borrowing USDC, potentially attracting more people to borrow USDC.