Simple Summary
To incentivize higher utilization and increased TVL in the Ethereum 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 0.03
- Increase Annual Borrow Interest Rate Slope High from 0.5172 to 1.0
- Decrease Annual Supply Interest Rate Slope Low from 0.0284 to 0.023
- Increase Annual Supply Interest Rate Slope High from 0.6067 to 1.0
Analysis
In the past few weeks, the Ethereum WETH comet has had low WETH utilization. The WETH utilization is currently 40%, resulting in negative reserve growth.
Supply cap utilizations are shown below:
| Symbol | Supply Cap Utilization |
|---|---|
| wstETH | 34.3% |
| cbETH | 0.1% |
| rETH (recently listed) | 0.0% |
Current IR curve
The current IR curve is shown below, with a secondary axis showing Annual WETH Reserve Growth (USD) assuming the current $42M WETH borrows:
Under the current IR curve, Borrow APR at the 90% utilization kink is 4.32%. Reserve growth is negative below 50% utilization and positive above 50% utilization.
Below is a table of the 30 day moving average staking APRs for all 3 WETH LST collateral assets:
| Symbol | 30 day moving average staking APR |
|---|---|
| wstETH | 3.77% |
| cbETH | 3.48% |
| rETH | 3.23% |
As a step towards incentivizing higher utilization and TVL, we recommend updating the base and slope of the Borrow APR curve such that the Borrow APR at the 90% utilization kink is 3.20%, 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 3.20% at the 90% utilization kink is shown below:
Reserve growth is negative below 60%, but the curve incentivizes higher utilization due to the decreased Borrow APR. The current WETH Borrow APR of 2.46% corresponds to 65% utilization on the recommended IR curve, which would yield positive reserve growth.
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 0.03
- Increase Annual Borrow Interest Rate Slope High from 0.5172 to 1.0
- Decrease Annual Supply Interest Rate Slope Low from 0.0284 to 0.023
- Increase Annual Supply Interest Rate Slope High from 0.6067 to 1.0
Next Steps
- Target on-chain vote 12/4/23.