Simple Summary
Gauntlet recommends adjusting the Arbitrum v3 USDC Native, Arbitrum v3 USDC.e, and Base v3 USDbC Interest Rate (IR) Curves with four main objectives:
- Raise Borrow APR and Supply APR rates at the kink due to sustained high utilization
- Increase the kinks
- Ensure positive reserve growth beyond the kink
- Increase the rate caps
The chart below displays the current and proposed IR curve, including projected annual reserve growth based on a $20M borrowing amount.
The proposed IR curve requires the following parameter changes:
- Raise Annual Borrow Interest Rate Slope Low from 0.035 to 0.053
- Raise Borrow Kink from 0.8 to 0.85
- Raise Annual Borrow Interest Rate Slope High from 0.25 to 1.8
- Raise Annual Supply Interest Rate Slope Low from 0.0325 to 0.048
- Raise Supply Kink from 0.8 to 0.85
- Raise Annual Supply Interest Rate Slope High from 0.4 to 1.6
Analysis
Current IR curve
The existing Arbitrum v3 USDC Native IR, Arbitrum v3 USDC.e, and Base v3 USDbC IR curve is depicted above, along with the projected annual reserve growth at various utilization levels with $20M in USDC borrowing. The supply and borrow kinks occur at 80% utilization, with a Supply APR of 2.6% and a Borrow APR of 4.3%. Reserve growth is positive between 50% and 85% utilization, but negative otherwise.
Objective 1: Increase Borrow and Supply APR at the Kink
In recent times, the Arbitrum v3 USDC Native IR, Arbitrum v3 USDC.e, and Base v3 USDbC comets have seen prolonged periods of USDC utilization surpassing the 80% kink. In the last couple days, utilization has reached 100% in the Arbitrum USDC comets, and is at 90% in the Base USDCbC comet. This indicates much higher borrowing demand than supply at the current APRs. Yield for short term treasuries is above 5%, and there has been an increased demand for stablecoin borrowing within the DeFi ecosystem. To address this, we recommend adjusting the slopes to set the Supply APR at the kink to 4.08% and the Borrow APR to 6.00%, up from 2.60% and 4.30% respectively.
Objective 2: Raise the Kinks
Increasing the kink to 85% allows for more appealing APRs and more pre-kink USDC liquidity. By setting higher post-kink slopes, USDC suppliers can have more security they will not face liquidity crunches should they decide to withdraw, despite the increased kink.
Objectives 3 & 4: Ensure Positive Reserve Growth Beyond the Kink, and Increase the Rate Caps
As indicated in the chart above, the projected annual reserve growth takes a negative turn beyond 85% utilization. This occurs because the post-kink supply APR rises at a faster pace than the post-kink borrow APR, resulting in an intersection of the two lines. Initially, this IR curve design aimed to temporarily sacrifice reserve growth to incentivize TVL growth, encouraging USDC suppliers to increase their deposits during periods of high utilization. However, due to the increased stablecoin borrowing demand, and considering recent growth in all comets, it’s time to revisit the IR curves. We recommend updating the curve to ensure positive reserve growth even after the kink, extending this growth to 100% utilization. Additionally, we recommend increasing the post-kink slopes to prevent liquidity crunches during times of high USDC borrowing demand. This adjustment aligns with the protocol’s evolved growth phase and prioritizes profitability.
Recommended curve
The above chart illustrates the proposed IR curve, achieving all the stated objectives.
The parameter changes required for this curve are as follows:
- Raise Annual Borrow Interest Rate Slope Low from 0.035 to 0.053
- Raise Borrow Kink from 0.8 to 0.85
- Raise Annual Borrow Interest Rate Slope High from 0.25 to 1.8
- Raise Annual Supply Interest Rate Slope Low from 0.0325 to 0.048
- Raise Supply Kink from 0.8 to 0.85
- Raise Annual Supply Interest Rate Slope High from 0.4 to 1.6
Next Steps
- Target on-chain proposal 12/15/23