Simple Summary
Gauntlet recommends the following changes to the Polygon Compound v3 USDC comet:
- Increase daily USDC supply COMP rewards from 0 to 34.73 ($1,433/day)
- Increase WBTC supply cap from 400 ($12M) to 1,000 ($30M)
- Increase WETH supply cap from 11k ($22M) to 20k ($40M)
- Increase MATIC supply cap from 10M ($10M) to 20M ($20M)
Our analysis indicates the supply rewards allocation will increase USDC supply and decrease USDC utilization, which will incentivize larger USDC borrowers to join the protocol in its early stages.
The increased supply caps will ensure new USDC borrowers’ collateral supplies won’t be restricted.
Analysis
As mentioned in our Compound Migration and Polygon Comet Update (4/21/23), the high USDC utilization combined with the low TVL in the Polygon comet seems to be dissuading large borrowers from joining the protocol, despite the appealing positive Net Borrow APR.
Specifically, total USDC supply is $6.43M and total USDC borrows are $5.42M, resulting in 84.2% utilization, and only $1.01M USDC available to be borrowed. Therefore, users are deciding not to borrow USDC, despite the (9.44% Borrow Distribution) - (5.34% Borrow APR) = (+4.11% Net Borrow APR), as shown below.
By adding 34.73 daily supply COMP rewards (matching the 34.73 rewards on the borrow side), USDC suppliers would immediately receive an 8.13% Earn Distribution. New USDC suppliers will immediately be incentivized to supply USDC at a (4.27% Earn APR) + (8.13% Earn Distribution) = (12.40% Net Earn APR).
Holding the $5.42M borrows constant, $10M of total USDC supply with these incentives would result in 54.2% utilization, and a resulting (1.76% Earn APR) + (5.23% Earn Distribution) = (6.99% Net Earn APR), still greatly incentivizing supply and unlocking > $4M USDC for borrowers. The resulting Net Borrow APR as a result of the lower utilization would be +6.26%, so both USDC suppliers and borrowers would be incentivized to join the comet, gaining greater momentum for growth.
Predicting how exactly the new equilibrium is reestablished as a result of this reward allocation is pure speculation, but an equilibrium of $25M USDC supplied and $18M USDC borrowed is feasible, as shown in the comparison below.
Current Equilibrium | Possible Post-Proposal Equilibrium | |
---|---|---|
USDC supply | $6.43M | $25M |
USDC borrows | $5.42M | $18M |
Utilization | 84.2% | 72% |
Earn APR | 4.27% | 2.34% |
Earn Distribution | 0% | 2.09% |
Net Earn APR | 4.27% | 4.43% |
Borrow APR | 5.34% | 4.02% |
Borrow Distribution | 9.44% | 2.91% |
Net Borrow APR | +4.10% | -1.11% |
Next Steps
This proposal doubles the current Polygon COMP rewards. As Kevin mentioned in this post, the Polygon rewards contract now has about 19 days of COMP rewards left to distribute. Our proposal would half the number of days of COMP rewards left to distribute. So we support increasing the Polygon COMP rewards, and can wait until after the rewards have been replenished to create an on-chain proposal with our proposed changes.
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