[Gauntlet] Compound v2 Deprecation (Phase 6) (12/4/23)

Simple Summary

For Phase 6 of the Compound v2 deprecation, Gauntlet recommends the following v2 reward updates:

  • Decrease Daily COMP DAI Supply Rewards from 111.20 to 25.
  • Decrease Daily COMP DAI Borrow Rewards from 111.20 to 25.

We will create a poll to gauge community preferences.

Given the current COMP price of $50, these changes would save the protocol $3.15M/year in COMP tokens, while aiming to eliminate the remaining DAI recursive borrowers from v2.

Analysis

In our v2 Deprecation Strategy poll, the community voted to “deprecate v2 excluding DAI and USDT”, since there are not yet any comet markets for those assets.

As a result, we have not proposed changes to the USDT or DAI Reserve Factor parameters, and we have not decreased the v2 COMP DAI rewards.

The above table shows that Compound continues to allocate 111.20 daily COMP rewards each to DAI suppliers and borrowers, totaling $4.06M COMP annually, which constitutes 20.1% of Compound’s total COMP reward distribution. DAI remains the sole v2 asset distributing rewards.

Maintaining DAI rewards in v2 aims to keep current DAI suppliers and borrowers within the Compound ecosystem in anticipation of the launch of v3 comets. However, as indicated by the subsequent table, the current COMP distribution for DAI results in a Net Earn APR of 4.72% at the 80% utilization point and a Net Borrow APR of 3.36%, encouraging recursive borrowing.

Earn APR (at the kink) Earn Distribution Net Earn APR Borrow APR (at the kink) Borrow Distribution Net Borrow APR
3.40% 1.32% 4.72% 5.00% 1.64% 3.36%

Indeed, as shown below, the largest DAI supplier and borrower is a recursive user with address ending in d9890668, with $64.43M supplied and $40.59M borrowed. Such usage does not align with the intended purpose of the v3 comets.

Top 10 user positions ordered by DAI supply

Top 10 user positions ordered by DAI borrows

The following illustrates a theoretical evolution of DAI net APRs. It begins with the current v2 state, then depicts APRs after reducing both DAI COMP supply and borrow distributions from 111.20 to 25, and finally shows the APRs assuming the recursive borrower exits the protocol.

Scenario Earn APR (at the kink) Earn Distribution Net Earn APR Borrow APR (at the kink) Borrow Distribution Net Borrow APR
Current State 3.4% 1.32% 4.72% 5.0% 1.64% 3.36%
Reduce DAI COMP Rewards to 25 3.4% 0.51% 3.91% 5.0% 0.55% 4.45%
Recursive Borrower Leaves 3.4% 0.60% 4.00% 5.0% 0.74% 4.26%

These reward reductions would save the protocol $3.15M/year in COMP tokens, while disincentivizing DAI recursive borrowing in v2, as the Net Supply APR after the rewards changes is lower than the Net Borrow APR.

Note that the second-largest DAI borrower with address ending in fbe5ddc3 is a non-recursive borrower whom we aim to retain in the Compound ecosystem. They supply $52.06M in WETH and WBTC and borrow $33.55M in DAI and USDT, predominantly DAI. Reducing rewards might lead this user to exit the protocol before the launch of a v3 alternative. However, this user, along with others, could return once a v3 comet is available. Our analysis suggests that the potential savings in COMP tokens justify this risk.

Next Steps

  • Create poll to gauge community preferences.
1 Like

To gauge community sentiment, we are starting a poll below.

Compound v2 Deprecation (Phase 6)
  • 1.Reduce v2 DAI supply & borrow COMP rewards to 25
  • 2.Keep v2 DAI supply & borrow COMP rewards at 111.20
  • 3.Abstain
0 voters

Thanks for everyone’s participation in the poll. We posted the on-chain proposal for option 1 as phase 6 of the v2 deprecation here. Voting begins in 1 day and lasts for 3 days.

The proposal has passed and been executed. We thank the community for their participation.

The recursive DAI borrower previously mentioned, with the address ending in d9890668 , who initially supplied $64.43M DAI and borrowed $40.59M DAI but was not an intended v3 user, has altered their position in response to this proposal passing. They now supply $22.37M DAI and have no outstanding borrows, making them an intended v3 user.

Meanwhile, the second-largest DAI borrower, with the address ending in fbe5ddc3 , remains active within the Compound ecosystem. This non-recursive borrower, who we aim to retain, is currently supplying $47.5M in collateral and borrowing $28.2M DAI, now making them the largest DAI borrower in the protocol.