[Gauntlet] Rewards Contract Top-Up for Ethereum and Base (11/18/24)

[Gauntlet]

Simple Summary

Gauntlet recommends adding additional COMP to the reward contracts of Ethereum and Base:

Chain	Reward Amount
Base	4,950
Ethereum	11,340

Analysis

Below is the projected runway in each chain’s rewards contract.

Chain	Rewards contract COMP token holdings	Current Daily COMP token reward distributions	Remaining days of runway (not including existing claimable rewards)
Polygon	3,518	23.0	153
Optimism	2,802	27.0	103
Ethereum	28,625	378.0	75
Base	1,047	55.0	19
Arbitrum	15,762	130.0	121

Base and Ethereum currently have a runway with less than 80 days. Gauntlet recommends topping up an additional 3 months’ worth of runway for Base and 1 month of runway for Ethereum

Next Steps

Target on-chain vote - 11/19/24

[bryancolligan]

Voted against as I believe we are deploying rewards and incentivizes incorrectly. The current market conditions don’t need the protocol to incentivize any borrows. Utilization is at max capacity across almost every market. We should be solely focusing on incentivizing lending side. The response time to market conditions is wasteful and incentivizing borrows doesn’t make sense.

[misher]

As a lender myself, rates over 10% basically get me. I don’t put more in simply because I want to diversify incase of an incident. You’d probably be better off putting money into marketing the interest rates offered for savings. That 0.4% ontop of my 16% for my USDC isn’t a dealbreaker.

That being said, with rates this high you could consider cutting incentives and using it later when rates lower.

Edit: USDC now at 5% please top up.

[pennblockchain]

We agree with @bryancolligan on all his points.

Given the current market environment we believe its most important to stream all incentives to lenders and beef up supply. This has a couple second order effects that particularly benefit the protocol in a market environment like the one we’re currently in.

1. Motivate sticky lender liquidity
2. Reduce utilization across markets
3. Decrease borrow rates in those markets

These effects are particularly beneficial during the current market environment because we can strategically boost our potential to support leverage looped positions for those desiring more exposure to the market to capture upside.

1. A reduction in utilization would increase the potential for increased borrowing / looping.
2. Decreasing borrow rates will motivate increased borrowing / looping.
3. Creating an environment for sticky liquidity and sustained supply growth could cause a positive feedback loop.

We will vote to abstain on this because we would like to see a proposed action plan to capture more supply considering the current market conditions and an expectation of continued growth for at least the next quarter.

[Gauntlet]

[Gauntlet] - Rationale for incentives

Maintaining the reward stream on Base and Ethereum is critical to preserving the incentive structure for active Compound users. Failing to replenish rewards risks creating a suboptimal user experience, where users although continue to earn but cannot claim earned rewards. This could undermine engagement and impact Compound’s attractiveness compared to competitors. As highlighted, Base has less than two weeks of incentives remaining, while Ethereum’s reserves are projected to deplete within 90 days.

Gauntlet recommends a timely top-up of rewards across all Comets on Base and Ethereum to sustain momentum, particularly for newer Comets such as AERO, USDS, and wstETH, which are rapidly accumulating TVL. Any delay in extending the reward stream risks impeding the growth of these Comets, as diminished incentives would reduce user participation and liquidity provisioning.

Current Daily Supply Incentives Across Ethereum and Base Comets

Current Daily Borrow Incentives Across Ethereum and Base Comets

Gauntlet has recommended allocating greater incentives to the supply side compared to the borrow side for both Base and Mainnet Comets See here and here, aligning with varying market conditions. Currently, supply-side incentives are set at 240 COMP/day, while borrow-side incentives stand at 190 COMP/day, reflecting a skew toward lenders. The incentives have minimal impact on the interest rates - less than 0.6% — on market rates for mature Comets like USDT, USDC, and WETH and act more as a buffer when utilization deviates from kink. At prevailing utilization levels, any adjustments to incentives would result in only marginal changes to interest rates.

Recent fluctuations in interest rates are reflective of broader market trends. Gauntlet continues to monitor these developments closely and is prepared to recommend data-driven adjustments to the IR curves to better align with recent trending market conditions. The below charts show that utilization has mostly remained near kink.

USDC Mainnet 90-day utilization

WETH Mainnet 90-day utilization

**USDT Mainnet 90-day utilization

Although Gauntlet agrees that a decrease in borrow incentives and increase in supply incentives is a probable solution, it is inadequate to tame utilization and prevailing market rates. We also believe completely removing borrow incentives would incur yield shock to users where the Net Borrow APY would increase by 21%. We recommend and will prescribe changes to both IR curves and incentives as the ideal solution to further align utilization levels.

[Tane]

We appreciate the comprehensive analysis provided by @Gauntlet and agree with many of the points raised, particularly the emphasis on maintaining a balanced approach to incentives for both lenders and borrowers.

Recent votes to raise supply caps highlight the growing demand across various markets. To address this demand, I agree that strengthening lending incentives and ensuring stable liquidity supply are critical steps. Gauntlet’s insights on the potential impact of adjustments to borrowing incentives, including the risk of yield shocks, underscore the importance of a carefully calibrated approach.

At the same time, we believe that maintaining attractive options for borrowers compared to other protocols is crucial for Compound to stay competitive. By focusing on lending incentives while making thoughtful adjustments to borrowing incentives, we can support sustainable growth and encourage broader participation in the protocol.

[misher]

Given that COMP price is up more than double since this discussion began perhaps the situation has changed somewhat?

That being said I’d like this to be refilled ASAP since I’m losing money haha.