Hi Compound fam,
We recently saw a large amount of COMP borrowed in order to submit/participate in Compound proposal 84 (adjusting TUSD market parameters). This user has maxed out the available borrow limit (screenshot of contract below), but is only paying around 6% yearly interest to hold this position open.
The Compound community has favored limiting the amount of borrow liquidity for COMP to reduce governance risks, but this can cause an imbalance where users can borrow COMP at artificially low rates. While borrow rates are no longer negative (after COMP rewards were removed for cCOMP borrowers), they still seem to be too low to incentivize repayment.
I think a simple way to address this market inefficiency, while maintaining existing borrow limits, is to adjust the interest rate model for the cCOMP market. Example parameters below that I think could help the market reach equilibrium more consistently:
- Rate at 0% utilization: 5%
- Optimal utilization (kink point): 50%
- Rate at optimal (50%) utilization: 100%
- Rate at 100% utilization: 300
If cCOMP used the above example rate model, borrowers would be paying 33% interest on the existing 15% market utilization rate, which may be enough to reduce borrowing demand below the market’s limit. It may also make sense to significantly increase the reserve factor (eg from currently 25% to 50%+, maybe even 100%) as deposit inflows from users responding to higher returns could offset the increase in borrow costs.
Curious to hear others’ thoughts on the matter!