[Gauntlet] Arbitrum USDC Comet - Interest Rate Curve Recommendations

[Gauntlet]

Simple Summary

This proposal updates the interest rate parameters for the Arbitrum USDC comet as originally intended by the USDC comets recommendations here. In proposal 226, an error occurred in Bridge wrapped actions to Arbitrum in the call to setBorrowPerYearInterestRateSlopeLow. This led to an unintended high borrowing APR for the Arbitrum USDC market. The below proposal will be published on-chain as soon as possible. We are exploring options to reimburse impacted borrowers for the temporary high interest rate and will keep the community updated.

Specification

Parameter	Current Value	Recommended Value
Annual Supply Interest Rate Base	0	0
Annual Supply Interest Rate Slope Low	0.075	0.075
Supply Kink	0.9	0.9
Annual Supply Interest Rate Slope High	3.6	3.6
Annual Borrow Interest Rate Base	0.015	0.015
Annual Borrow Interest Rate Slope Low	0.833	0.0833
Borrow Kink	0.9	0.9
Annual Borrow Interest Rate Slope High	4.3	4.3

Next Steps

We will put up the on-chain proposal as soon as possible, targeting today. We will also work with OpenZeppelin to align on an updated proposal review process to prevent these issues from occurring in the future.

[Gauntlet]

The proposal has been published here. Voting begins in 1 day and lasts for 3 days.

[cylon]

OpenZeppelin has prioritized reviewing proposal 231 for Gauntlet and we’ve confirmed it will fix the borrowing APR issue. We expect it should be executed before the end of next week.

We did review the possibility of pausing the market in consultation with the Pause Guardian multi-sig but concluded it will not stop accruals under the excessive borrowing APR. We have not identified any other risks to the protocol aside from higher costs for borrowers in the USDC Arbitrum market.

[Gauntlet]

As an update, the Abitrum USDC Comet Interest Rate curve proposal is expected to be executed on-chain on March 28. Gauntlet has analyzed the impact of the unintended high-interest rate on borrowers. There are approximately 2.8k suppliers and borrowers impacted by the unintended IR and as of March 27, 2024, the total estimated impact is $114,000. Gauntlet will provide a finalized estimated impact value once proposal 231 is executed. Below we provide additional details on our payment plan for impacted users (the “Payment Plan”).

Plan for Disbursement to Impacted Users

Once we receive confirmation from the community after posting to the forum, we will create a proposal that reserves be withdrawn from the USDC Arbitrum Comet and deposited to the Merkl Platform in order to facilitate an airdrop in accordance with the Payment Plan. Merkl will aggregate the payment plan in a Merkle tree, then compress it into a Merkle root and push on-chain to allow users to claim their USDC. Users whom timely confirm their impact will be able to claim their share of the deposited assets in USDC.

Timeline for Payment Plan Implementation

• Step 1: Gauntlet will provide final impact calculations for review and confirmation by impacted users.
• Step 2: Gauntlet will create a proposal to withdrawreserves from Arbitrum USDC Comet and send them to Merkl for distribution to impacted users.
• Step 3: Users may then use a preset interface to claim their proportional share of the Payment Plan assets after confirming impact.
  
  

We estimate that a number of users we impacted as a result of an inadvertent error in setting the borrowing rate, which may have resulted in interest obligations that would not have been predicted by historical usage and expected interest rate curves. We did not observe any impact on suppliers from this situation, as a result of the affected payment streams being redirected into reserves, as illustrated in the chart below. The higher borrowing rate resulted in low utilization, thus impacting suppliers’ interest payments. Gauntlet recommends compensating borrowers and suppliers in accordance with the Payment Plan discussed above.

Arbitrum Native USDC Reserve Growth

After implementing the adjustments to the Arbitrum USDC Comet, Gauntlet will provide further information on impacted users and the methodology used to determine the Payment Plan allocation among impacted users.

Next Steps

• Provide the community with a list of impacted users and estimated payment amounts, along with the calculation methodology after proposal 231 is adopted on Arbitrum.

[Gauntlet]

Proposal 231 was executed at 10:54:38 AM UTC on March 28th, block number 195068610. Since then, market utilization and interest rates have begun to stabilize, and TVL is recovering. Since Proposal 231 was executed, Gauntlet is proposing to pay affected users with USDC reserves from the Arbitrum Comet as detailed below.

Disbursement List of Impacted Users and Amounts

We’ve determined payment amounts to compensate users affected by the incorrect interest rate parameter. Two distinct amounts have been calculated based on users’ positions within the Comet. Borrower payment signifies the payment amount per user’s borrowing position, while Supplier payment signifies the payment amount per user’s supplying position.

To optimize payments relative to gas costs and overhead, Gauntlet established a criterion requiring affected users to have had an impact of 1 USDC or more to qualify. We welcome community feedback on this decision, which enables us to prioritize resources for the most impacted accounts.

Here is a link to a list of impacted accounts and amounts at issue.

Total Financial Impact to Users: $127,602

Number of Users Receiving Payments: 745

Community Feedback

Ample time will be provided for community feedback on disbursement amounts and the Payment Plan. For specific requests or concerns about owed amounts, please reach out to Gauntlet via our Twitter handle: @gauntlet_xyz

Methodology for Calculating Impact and Payments

When estimating the expected Borrow APR and Supply APR, Gauntlet used historical APR averages to estimate the projected Borrow and Supply APR during this incorrect borrowing rate. Utilization, which is used as a key input for APR calculations, did not fully represent the actual demand for borrowing or supplying assets within the Comet when the erroneous borrow APR was used. The high borrow APR had an unintended impact on user behavior. As such, the use of historical Borrow APR and its corresponding Supply APR based on interest parameters is the best indicator in estimating reimbursed USDC reserves.

Gauntlet calculated the impact amount per user based on their position balances, incurred interest payments and expected interest payments calculated via historical APR. With these assumptions, Gauntlet calculated how much interest a user should have paid/received vs actual interest paid/received. The difference between actual and expected is how we calculated the impact amount.

Estimated APR

7-Day Borrow APY AVG: 15.43%

Corresponding Supply APY: 12.45%

Arbitrum Compound v3 Natie USDC Historical Supply and Borrow

APR Calculations

Payment Calculations

Next Steps

• Give the Community time to provide feedback and to reach out with any questions.
• Gauntlet will provide further updates on a detailed timeline and the next steps for confirming and claiming payments.

[Gauntlet]

Payment option for interest rate impact for Arbitrum USDC Comet

As an update, Gauntlet is offering a payment option for certain eligible token holders whose wallet values were impacted by interest rate change resulting from the governance proposal 226 applied as of March 19, 2024.

If you are an affected user, please follow the instructions at this link: https://compound-release.gauntlet.xyz/.

Next Steps

The above link will be available until 23:59 UTC on May 1. We will put up an on-chain proposal for the disbursement of funds to affected users, targeting mid May.