Gauntlet recommends the following changes to the Ethereum v3 USDC IR curve:
- Increase Borrow Kink from 90% to 95%
- Increase Annual Borrow Interest Rate Slope High from 0 to 0.567
Gauntlet recommends the following changes to Ethereum v3 USDC rewards:
- Decrease daily USDC borrow COMP rewards from 481.41 to 381.41 (~$22,800/day)
- Increase daily USDC supply COMP rewards from 0 to 100 (~$6,000/day)
The proposed IR curve increases the Borrow Kink to 95% and re-introduces the positive Annual Borrow Interest Rate Slope High, at a milder level than was initially set when launching the comet. This change will eliminate reserve losses at high utilizations, and will increase liquidity for both USDC borrowers and suppliers.
This change will not affect borrow or supply APRs when utilization is ≤ 90%, and it will have minimal impact on borrow APR when the utilization rate is ≤ 95%.
The most recent Ethereum v3 USDC IR Curve proposal was executed on 5/30/23, which flatlined Borrow APR at 4%.
The proposal has succeeded in keeping borrowers in the protocol during times when USDC supply decreased, and has incentivized borrowers to join the protocol to take advantage of the borrowable USDC.
As of 7/6/23 (not included in the charts below) the USDC supply is $276M, and borrows are $272M, both of which are all-time highs.
Through incentivizing existing borrowers to stay in the protocol and new borrowers to join by flatlining the Borrow APR curve, the protocol has incurred three periods of high utilization.
On 6/6/23 and 6/19/23, large USDC suppliers removed their entire supply positions, resulting in periods of high utilization. In response, few borrowers decided to leave the protocol, given the flatlined 4% Borrow APR. In the following days, new smaller USDC suppliers joined the protocol, thereby returning utilization to the intended 85%-95% range.
As seen above, this also improved the USDC supplier distribution, as the average USDC supply amount and standard deviation of USDC supply amounts decreased among the top suppliers.
In the past couple days (7/5/23 - 7/6/23), the protocol has also incurred high utilization levels, as TVL has also increased.
Cumulative USDC Reserve Growth since previous IR Curve change
As seen above, the occasional periods of high utilization have resulted in the protocol experiencing negative reserve growth. Note the total net reserve growth since the IR curve change is still positive, and the short-term reserve losses to incentivize TVL are minimal relative to the ~$30k/day Ethereum v3 USDC COMP rewards being distributed.
That said, to avoid the periods of high utilization and free up USDC liquidity for suppliers and borrowers, we recommend a hybrid approach to the initial and current IR curves. The hybrid approach increases the Borrow Kink and re-introduces the positive Annual Borrow Interest Rate Slope High, at a milder level than was initially set when launching the comet. This change will eliminate reserve losses at high utilizations, and will increase liquidity for both USDC borrowers and suppliers.
We also recommending reallocating 100 of the 481.41 daily COMP borrow rewards to suppliers in order to further increase USDC liquidity.
- Targeting on-chain vote on 7/10/23.