Addressing cCOMP Market Inefficiencies

Ideas
1

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.

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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.

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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!

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2

I agree that something should be changed.

This kind of problem can occur with any market with a borrow cap, and it could be tedious to adjust interest rate curves for all markets with borrow caps, and possibly every time a borrow cap is changed.

Rather, I think it would be much simpler to adjust utilization levels; looking at total borrowing capacity rather than total supply. Right now, the COMP market is at 99% utilization against its borrowing capacity, and borrowers should be paying 198% if such steps were taken.

Note: if we were to take my suggested approach, we’d have to adjust how deposit interest rates are displayed in our UIs. So like scale the deposit interest rate (being displayed) by borrowingCapacity / totalSupply.

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3

Agree with @TylerEther here that it would make more sense to change the formula rather than the interest rate curves for every market. However imo warrants a deeper discussion, cc @pauljlei & the Gauntlet team here as well - would love to get insight into how exactly making the borrow rate a function of the borrow cap & total borrow rather than of total supply & total borrow would impact the health of markets. Definitely think that this needs to change in order to prevent unintended behavior (i.e. low borrow rate here for hitting the borrow cap)!

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