Gauntlet Update
Following community feedback, please see below an updated step 1 of the migration plan to align with the community’s strategic preference.
Following this initial stage, we will monitor how conditions evolve, which will inform the next stage of migration.
- Decrease v2 daily USDC supply COMP rewards from 241.20 to 211.20 (-30)
- Decrease v2 daily USDC borrow COMP rewards from 241.20 to 211.20 (-30)
- Decrease v2 daily DAI supply COMP rewards from 241.20 to 211.20 (-30)
- Decrease v2 daily DAI borrow COMP rewards from 241.20 to 211.20 (-30)
- Increase v3 daily USDC borrow COMP rewards from 161.41 to 281.41 (+120)
- Increase v3 ETH supply cap from 150k to 350k
- Increase v3 WBTC supply cap from 6k to 12k
- Increase storefront price factor from 50% to 60%
Analysis
Note: Assumes COMP price is $50.
Current v2 COMP distributions
| Daily Supply | Daily Supply (USD) | Daily Borrow | Daily Borrow (USD) | |
|---|---|---|---|---|
| DAI | 241.20 | $12,060 | 241.20 | $12,060 |
| USDC | 241.20 | $12,060 | 241.20 | $12,060 |
| USDT | 34.74 | $1,737 | 34.74 | $1,737 |
Compound distributes roughly $50k COMP/day (~$18.25M COMP/year) to stablecoin users in Compound v2.
Current v3 COMP distributions
| Daily Supply | Daily Supply (USD) | Daily Borrow | Daily Borrow (USD) | |
|---|---|---|---|---|
| USDC | 0 | $0 | 161.41 | $8,070 |
Compound distributes roughly $8k COMP/day (~$2.95M COMP/year) to stablecoin users in Compound v3.
Current v3 daily reserve growth
Data is from 2023-02-15.
Current borrows: $104M
Current utilization: 68%
Below is a table of various daily reserve growth and earn APRs given the current borrows in Compound v3 at various utilization rates. Note that v3 daily reserve growth is only positive between 50% and 85%.
| Utilization | Daily reserve growth | Earn APR |
|---|---|---|
| 0% | -$4,200 | 0.03% |
| 50% | $28 | 0.03% |
| 68% (current) | $1,800 | 2.21% |
| 86% | -$40 | 5.0% |
| 90% | -$1,520 | 6.60% |
| 95% | -$2,860 | 8.60% |
| 100% | -$3,720 | 10.60% |
Given the current v3 state, the daily reserve growth is $1,800/day.
On the low end of the utilization curve, the max loss in reserves would be $4,200/day at 0% utilization.
On the high end of the utilization curve, the max loss in reserves would be $3,700/day at 100% utilization.
The reserves scale linearly with borrows.
Notable v2 non-recursive USDC borrowers
| Address | Supply tokens | Supply | Borrows |
|---|---|---|---|
| 28617487 | WBTC, ETH, BAT | $146.2M | $66.2M |
| 6e5665bd | ETH | $27.7M | $14.1M |
| 64639cf8 | ETH, WBTC | $19.6M | $10.4M |
| 7499bba9 | ETH | $22.2M | $10.0M |
| ec64ca41 | ETH | $39.2M | $9.1M |
| 14c3cfdd | ETH, WBTC | $14.3M | $7.0M |
Supply (USD)
Borrows (USD)
Notable v2 non-recursive DAI borrowers
| Address | Supply tokens | Supply | Borrows |
|---|---|---|---|
| fbe5ddc3 | ETH | $36.0M | $24.7M |
| aa43ba42 | WBTC | $10.7M | $4.9M |
Supply (USD)
Borrows (USD)
Notable v2 non-recursive USDT borrowers
| Address | Supply tokens | Supply | Borrows |
|---|---|---|---|
| e9605af5 | ETH, WBTC | $19.1M | $7.3M |
Supply (USD)
Borrows (USD)
Goal
For the first phase of the migration, we aim to incentivize some of the largest non-recursive v2 accounts to migrate to v3. The above accounts supply solely ETH and/or WBTC, except for the largest account, which also supplies some BAT. There is currently $104M worth of borrows in v3, with 161.41 daily COMP borrow distributions, for a borrow distribution of 2.77%. To incentivize an additional $80M worth of borrows, we would add an additional 120 daily COMP borrow rewards to v3, and evenly decrease v2 USDC & DAI supply/borrow rewards. The initial increase in rewards would result in a borrow distribution of 4.83%, which would result in a positive 4.83% - 3.86% = 0.97% net borrow APR. Theoretically, the protocol would again reach equilibrium at $184M borrows, at which point the utilization would also be 68%, with the same earn/borrow APR, and the borrow distribution again diluted to 2.77%.
Risks
Increasing v3 COMP borrow rewards will initially result in higher utilization, which could result in short-term reserve losses if the utilization exceeds 86%. However, even in the most extreme case of 100% utilization, the daily reserve loss would only be ~$3,720 (in actuality slightly higher given increased borrows), which is low relative to the current reserves of $638k and low relative to the $58k daily losses in COMP distributions. And it seems likely that within a short time, suppliers would flock to the protocol to take advantage of the high supply APY.
Other risks of this plan include:
- Assumes borrowing demand exists.
- Could cause increased unforeseen market downturn risk if the health factors of new users are risky.
- Users from other protocols could migrate before v2 users get a chance.
- Requires setting higher initial supply caps to support the increased borrows.
- At a certain point, recursive borrowing in v2 will cease to be profitable, at which point some DAI and USDC recursive borrowers will close or reduce their positions, which will also affect v2 supply/borrows, utilization curves, and distribution APYs.
Analyzing v2 recursive borrowers
Notable v2 recursive USDC borrowers
| Address | Supply | Borrows |
|---|---|---|
| bc84d1eb | $71.7M | $51.7M |
| adc355ef | $43.2M | $36.6M |
| 81c793f3 | $20.6M | $17.1M (USDT) |
| 8717d99a | $14.8M | $12.3M |
| feecf8e1 | $14.2M | $11.0M (USDT) |
Supply (USD)
Borrows (USD)
The top 5 recursive USDC borrowers account for $164.5M USDC supply (27.9% of total USDC supply), $100.6M USDC borrows (32.3% of total USDC borrows), and $28.1M USDT borrows (24.4% of total USDT borrows). Note that if these recursive borrowers leave v2, the USDC and USDT distribution APYs will substantially increase.
The current DAI net earn APR is 2.34%, and the net borrow APR is 2.01%. If we decrease v2 USDC supply & borrow daily COMP distribution by 30, the new net earn APR will be 2.26%, and the new net borrow APR will be 2.17%, still somewhat incentivizing recursive borrows. Note that as some of the recursive borrowers leave, others will be reincentivized.
Notable v2 DAI recursive borrowers
| Address | Supply | Borrows |
|---|---|---|
| e0a9070c | $160.6M | $112.4M |
| 10772c4e | $82.9M | $68.6M |
| 6b4a437d | $22.7M | $15.0M |
Supply (USD)
Borrows (USD)
The top 3 recursive DAI borrowers account for $266.2M DAI supply (47.5% of total DAI supply) and $196.0M DAI borrows (67.5% of total DAI borrows). Note that if these recursive borrowers leave v2, the DAI distribution APYs will substantially increase.
The current DAI net earn APR is 2.18%, and the net borrow APR is 1.82%. If we decrease v2 DAI supply & borrow daily COMP distribution by 30, the new net earn APR will be 2.09%, and the new net borrow APR will be 2.00%, still somewhat incentivizing recursive borrows. Note that as some of the recursive borrowers leave, others will be reincentivized.
Conclusion
If we assume that users are elastic between borrowing USDC and DAI, the v2 reward distribution shouldn’t matter as much as the quantity.
To incentivize some of the top non-recursive v2 USDC borrowers to migrate over, we recommend initially adding 120 daily COMP distributions to v3 USDC borrow rewards and decreasing v2 DAI & USDC borrow & supply daily COMP distributions by 30.
In anticipation of the increased v3 USDC borrows, we recommend increasing the ETH and WBTC supply caps to 350k and 12k, respectively, and increasing the storefront price factor to 60% to further incentivize liquidators.
Next Steps
- Targeting an on-chain vote on 2/26/2023.
By approving this proposal, you agree that any services provided by Gauntlet shall be governed by the terms of service available at gauntlet.network/tos.