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.