Simple Summary
To incentivize higher utilization and increased TVL in the Base v3 WETH comet, Gauntlet recommends the following Interest Rate (IR) Curve updates:
- Decrease Annual Borrow Interest Rate Base from 0.0099 to 0.005
- Decrease Annual Borrow Interest Rate Slope Low from 0.037 to 0.035
- Increase Annual Borrow Interest Rate Slope High from 0.5172 to 1.0
- Decrease Annual Supply Interest Rate Slope Low from 0.0284 to 0.025
- Increase Annual Supply Interest Rate Slope High from 0.6067 to 1.0
Additionally, we recommend adjusting baseBorrowMin to 0.000001 to bring it in line with the values set on Ethereum.
Analysis
As seen in our weekly updates, the Base WETH comet has consistently had low WETH borrows (~$3M), low WETH utilization (~25%), and low cbETH supply cap utilization (~21%). This has resulted in minimal comet growth and negative reserve growth. A large WETH borrower has recently joined the protocol, increasing utilization to 44%. Even still, Gauntlet recommends updating the IR Curve to further incentivize borrowers to join the protocol.
Current IR curve
The current IR curve is shown below, with a secondary axis showing Annual WETH Reserve Growth (USD) assuming $5M WETH borrows:
Under the current IR curve, Borrow APR at the 90% utilization kink is 4.32%. Reserve growth is negative below 50% utilization.
The 7 day moving average cbETH staking APR is 3.67%. We recommend updating the base and slope of the Borrow APR curve such that the Borrow APR at the 90% utilization kink is 3.65%, also resulting in lower Borrow APRs below the kink. We will then update the Supply APR curve accordingly to ensure positive reserve growth at high utilizations below and above the kink. Note that since all COMP rewards are allocated to suppliers, WETH suppliers are still incentivized to join the protocol at lower Supply APRs.
Recommended IR curve
The recommended IR curve with a Borrow APR of 3.65% at the 90% utilization kink is shown below:
Reserve growth is negative below 57%, but the curve incentivizes higher utilization due to the decreased Borrow APR.
The following parameter changes are required to produce the recommended IR curve:
- Decrease Annual Borrow Interest Rate Base from 0.0099 to 0.005
- Decrease Annual Borrow Interest Rate Slope Low from 0.037 to 0.035
- Increase Annual Borrow Interest Rate Slope High from 0.5172 to 1.0
- Decrease Annual Supply Interest Rate Slope Low from 0.0284 to 0.025
- Increase Annual Supply Interest Rate Slope High from 0.6067 to 1.0
Next Steps
- Target on-chain vote 11/20/23.