Simple Summary
Gauntlet recommends adjusting the Polygon v3 USDC.e Interest Rate (IR) Curve with three main objectives:
- Raise Borrow APR and Supply APR rates at the kink due to sustained high utilization.
- Increase pre-kink USDC.e liquidity by raising the kinks.
- Ensure positive reserve growth beyond the kink.
The chart below displays the current and proposed IR curve, including projected annual reserve growth based on a $25M borrowing amount.
The proposed IR curve requires the following parameter changes:
- Raise Annual Borrow Interest Rate Slope Low from 0.035 to 0.04
- Raise Borrow Kink from 0.8 to 0.85
- Raise Annual Borrow Interest Rate Slope High from 0.25 to 0.7
- Raise Annual Supply Interest Rate Slope Low from 0.0325 to 0.04
- Raise Supply Kink from 0.8 to 0.85
- Raise Annual Supply Interest Rate Slope High from 0.4 to 0.65
Analysis
Current IR curve
The existing Polygon v3 USDC.e IR curve is depicted above, along with the projected annual reserve growth at various utilization levels with $25M in USDC.e 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 Polygon v3 USDC.e comet has seen prolonged periods of USDC.e utilization surpassing the 80% kink. This indicates 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 3.4% and the Borrow APR to 4.9%, up from 2.6% and 4.3% respectively.
Objective 2: Raise the Kinks
Currently, $27M USDC.e is supplied to the comet, allowing for a maximum of $5.4M USDC.e to be withdrawn at the kink, set at 80%.
The top USDC.e suppliers in the Polygon v3 USDC.e comet, shown above, hold $5.48M and $3.81M, respectively. Increasing the kink from 80% to 85% would still provide $4M USDC.e liquidity at the kink, ensuring sufficient liquidity for the second largest USDC.e supplier to fully withdraw their supply, and sufficient liquidity for the largest USDC.e supplier to withdraw a majority of their supply. This adjustment allows for more attractive rates and greater pre-kink usability.
Objective 3: Ensure Positive Reserve Growth Beyond the Kink
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.e suppliers to increase their deposits during periods of high utilization. However, considering that the Polygon v3 USDC.e comet now holds sufficient TVL with $27M USDC.e supplied and $25M USDC.e borrowed, it’s time to revisit the IR curve. We recommend updating the curve to ensure positive reserve growth even after the kink, extending this growth to 100% utilization. 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 0.04
- Raise Borrow Kink from 0.8 to 0.85
- Raise Annual Borrow Interest Rate Slope High from 0.25 to 0.7
- Raise Annual Supply Interest Rate Slope Low from 0.0325 to 0.04
- Raise Supply Kink from 0.8 to 0.85
- Raise Annual Supply Interest Rate Slope High from 0.4 to 0.65
Next Steps
- Target on-chain vote 12/11/23