Strategy’s BTC Sale, DeFi Recovery & Tokenized RWAs

In this report:

1. Strategy’s Bitcoin Sale: Narrative Shift and Its Impact on Basis

2. Trade Compression & Funding Carry Disruption

3. The rsETH/KelpDAO Incident: Major DeFi Exploit to Full Resolution

4. Rise of Tokenized RWAs and Equities

Q2 Crypto Lending Markets

March–May marked a period of consolidation and cautious recovery with continuous volatility from crypto’s worst Q1, with Bitcoin bottoming near $63k in late February before staging a two-month climb to approximately $78k by month-end April, a +23% recovery from cycle lows. In early May, it further rebounded to trade in a roughly $73k-$82k range, although prices pulled back afterwards. Ethereum lagged considerably with the price only recovering to around $2.4k entering April before dipping back close to $2k.

Crypto market’s trajectory was shaped by a few converging factors including the ongoing U.S.- Iran conflict, tariff-driven Fed paralysis and a lack of strong market narratives. On March 23, Trump announced “productive conversations” with Iran, sending the DXY reversing from above 100 to ~ 99, with the Brent crude down more than 7% in a single session and Bitcoin climbing back to $71k. The April 17 announcement that Iran would reopen the Strait of Hormuz then served as a more decisive macro catalyst, easing oil price concerns and triggering a broader return of risk appetite. While we saw a momentary recovery with Bitcoin climbing above $80k, it was short lived with prices going back below $80k with geopolitical risk flaring again after Trump warned Iran to “get moving, fast”. Compounding this, rising bond yields and persistent inflation concerns weighed on sentiment through the back half of May, with the 30-year treasury yield approaching 5% and Fed funds futures pricing zero probability of a June rate cut.

DeFi told a more cautionary story. Total Value Locked (TVL) had already compressed from its ~$170 billion October 2025 peak to roughly $99.5 billion under broad macro pressure, before a sector-defining security failure accelerated the drawdown. Following the Kelp DAO exploit in April, the total TVL dropped from $99.5 billion to $86.3 billion in just 48 hours with AAVE alone losing $8.45 billion. The contagion lingered in May, with DeFi TVL stabilizing in the $80-$85 billion range amid continued caution and lingering liquidity stress across lending protocols. Overall, the March–May period reflected a market still in volatile recovery mode, navigating an uncertain macro environment.

Key trends

001
Strategy’s Bitcoin Sale: Narrative Shift and Its Impact on Crypto Lending Markets

Most recently, Strategy disclosed the sale of 32 BTC between May 26 and May 31, generating approximately $2.5 million to fund distributions on its preferred securities. Although the transaction represented just 0.0038% of its 843,706 BTC treasury, it marked the company’s first reported bitcoin sale since 2022 and drew outsized market attention. The disclosure disrupted the long-standing “never sell” narrative, triggering a narrative-driven selloff that pushed Bitcoin briefly below $62,000. This volatility resulted in contained liquidation and modest deleveraging across crypto markets.Strategy has continued to actively optimize its capital structure in recent months. Earlier this year, the company completed a $1.5 billion debt repurchase of its 0% Convertible Senior Notes due 2029, reducing refinancing risk and enhancing financial flexibility. In parallel, Strategy has expanded its preferred equity platform, highlighted by the success of STRC - its variable-rate perpetual preferred security. Launched with a 9% dividend yield, STRC now pays an 11.5% annual dividend distributed monthly and has become a key funding vehicle, broadening the company’s investor base while complementing its common equity and convertible debt offerings.

The episode has had a noticeable, albeit contained, impact on lending markets. While major DeFi platforms maintained stable borrow rates and healthy utilization levels without signs of systemic stress, the heightened volatility has prompted a clear shift in borrower behavior. We are observing increased demand for USDC borrowing to meet liquidity needs, even as appetite for BTC-backed loans remains strong among institutions seeking to access capital without relinquishing long-term Bitcoin exposure. Collar loans remain a popular option for borrowers in this environment, as we continue to see growing demand for structures that combine BTC-collateralized borrowing with options overlays - buying puts for downside protection while selling calls to help offset premium costs. These structures provide non-recourse financing, minimize margin call risk, and deliver more predictable economics. Overall, this event appears to be contributing to accelerating the maturation of crypto lending toward more sophisticated, risk-managed credit solutions.

002
Basis Trade Compression & Funding Carry Disruption

Throughout March–May, the cash-and-carry trade strategy was severely disrupted. The annualized CME basis, which had offered 10-20%+ yields during the 2025 bull market compressed to roughly 4-6% by March and April which was near or below U.S. risk free rates. This triggered a broad unwind of institutional basis positions, with CME Bitcoin futures open interest falling to a 14-month low of ~$7.2 billion in early April as firms closed out short futures legs. On top of this, the perpetual funding rates stayed negative for 46+ consecutive days through mid-April, which was the most sustained stretch since 2023 with 7-day averages reaching around -0.005%, reflecting reduced long leverage demand and hedged arbitrage unwinds across the market. This weighed directly on lending activity, as a major source of stablecoin borrow demand in healthy markets is leveraged carry traders. With that demand largely absent, lending utilization and rates softened accordingly.

The second half of April brought a meaningful reversal, as geopolitical tensions eased and institutional spot accumulation returned, normalizing funding rates and drawing carry traders back into positions. However, May brought a second leg of pressure with Bitcoin futures open interest dropping from a peak of roughly $42 billion in early May to approximately $25 billion by month-end, with funding rates on offshore perpetuals flipping from persistently positive in early May back to neutral/negative by month-end. The pattern across the full three-month period was consistent: derivatives were deleveraging, and basis compression acted as a structural drag on lending demand.

003
The rsETH/KelpDAO Incident – From Major DeFi Exploit to Full Resolution

In April 2026, DeFi experienced its largest exploit of the year when attackers—preliminarily linked by LayerZero to North Korea’s Lazarus Group—compromised KelpDAO’s LayerZero OFT bridge infrastructure and drained approximately 116,500 rsETH from the Ethereum mainnet escrow, worth roughly $290 million at the time. According to Galaxy Research, the attack did not stem from a smart contract vulnerability but rather from a sophisticated compromise of the bridge’s message verification infrastructure, exposing critical risks around cross-chain security and validator configurations.

The stolen rsETH was rapidly deployed across DeFi. The attacker deposited the assets as collateral - primarily on Aave - and borrowed an estimated $236 million in WETH and wstETH against the position. The incident quickly evolved from an isolated exploit into a systemic liquidity shock. Utilization rates on several major lending pools surged toward 100%, emergency risk controls were activated, and users rushed to withdraw capital from lending markets. Within 48 hours, Aave experienced roughly $8.45 billion in deposit outflows, contributing to an estimated $13–15 billion decline in total DeFi TVL across the ecosystem. The severity of the disruption was amplified by the widespread use of leveraged ETH-restaking strategies across DeFi. Assets such as rsETH, weETH, and wstETH had become deeply embedded in recursive borrowing and looping strategies on Aave, increasing the system’s sensitivity to shocks affecting major collateral assets. USDC Borrow APR spiked to as high as almost 14% on April 20.

The industry’s response was coordinated and swift. Aave governance and risk providers implemented emergency freezes across affected markets to contain contagion, while the Arbitrum Security Council successfully recovered approximately 30,766 ETH connected to the attacker’s activities. At the same time, leading ecosystem participants organized through the DeFi United initiative, which mobilized more than $300 million in support commitments to help recapitalize affected protocols, backstop potential bad debt, and restore market confidence.

By late May 2026, the crisis had been fully resolved. KelpDAO restored 100% backing for rsETH through a series of five ETH recapitalization tranches, with the final deposit completed on May 26. In parallel, Aave gradually reopened impacted WETH and rsETH markets across its V3 deployments, ultimately restoring pre-incident risk parameters after extensive monitoring and stress testing. The successful passage of an Arbitrum governance proposal transferring recovered ETH to Aave further ensured that all outstanding liabilities could be covered without losses to suppliers. What began as one of the largest and most consequential DeFi exploits in history ultimately became a case study in coordinated crisis management, protocol resilience, and ecosystem-wide recovery.

004
Rise of Tokenized RWAs and Equities

Tokenized real-world assets (RWAs) continued to gain momentum, with tokenized equities emerging as one of the fastest-growing segments of the market. A major catalyst was increasing regulatory engagement around stock tokenization. The SEC explored frameworks that could support broader trading of tokenized public equities, including structures involving third-party tokenization models. At the same time, trading activity expanded across platforms such as xStocks, Hyperliquid, and Solana-based ecosystems, reflecting growing demand for blockchain-based access to traditional financial assets.

The trend marked a meaningful step forward in the convergence of traditional finance and digital asset markets. Investors could increasingly access familiar asset classes through blockchain infrastructure while benefiting from features such as 24/7 trading, faster settlement, and integration with other on-chain applications. New products further expanded the opportunity set. Ondo launched Ondo Perps, offering perpetual futures tied to U.S. stocks and ETFs, while Bitget introduced Reality, a platform for tokenized U.S. equities and ETFs backed by underlying shares. At the same time, tokenized RWAs continued expanding beyond equities and Treasuries, with protocols such as Pendle growing their presence in tokenized yield and credit-linked products.

Compared with the highly leveraged crypto looping strategies that came under pressure following basis trade compression and the rsETH/KelpDAO incident, tokenized RWAs offered an alternative source of yield and market participation. As infrastructure for tokenized stocks, Treasuries, credit products, and other securities continued to develop, RWAs increasingly emerged as one of the clearest examples of the growing overlap between traditional capital markets and blockchain-based financial infrastructure.

Notable News:

• CFTC Approves Bitcoin Perpetual Futures Trading in U.S. at Coinbase, Kalshi

• The State of Crypto Leverage – Q1 202

• CLARITY Act: Senate Banking Releases New Text, Sets Thursday Markup

• Unpacking Aave: Quantifying the Leverage in DeFi's Largest Looping Market

• KelpDAO/LayerZero Exploit Drains $290m, Freezes DeFi Markets

• Block by Block: How the rsETH Exploit Rattled Aave Lending Markets

• Galaxy Launches Institutional OTC Prediction Markets Trading

• Galaxy Receives BitLicense from the New York State Department of Financial Services