[Gauntlet] USDC Comets - Interest Rate Curve & Reward Recommendations (3/7/24)

Simple Summary

Given the rising demand for USDC borrowing and the maturity of existing USDC comets, Gauntlet recommends reducing rewards to achieve a Supply Distribution APR of 1% and Borrow Distribution APR of 0.5% in the Ethereum v3 USDC comet. For other USDC comets, except the Arbitrum USDC.e comet which remains at 0% rewards, the recommended rates are 2% for Supply Distribution APR and 1% for Borrow Distribution APR.

Additionally, Gauntlet recommends updating the USDC IR curves to feature a 90% kink, leading to a 5.04% supply APR and a 7% borrow APR.

Analysis

Reward Recommendations

Gauntlet recommends the following decrease in COMP rewards across USDC comets:

Enabled Markets Daily COMP Supply Rewards (Tokens) Daily COMP Borrow Rewards (Tokens) Recommended Daily COMP Supply Rewards (Tokens) Recommended Daily COMP Borrow Rewards (Tokens) Daily COMP Supply Rewards (USD) Daily COMP Borrow Rewards (USD) Supply APY Borrow APY Recommended Daily COMP Supply Rewards (USD) Recommended Daily COMP Borrow Rewards (USD) Recommended Supply APY Recommended Borrow APY Recommended Daily USD Savings
Compound III USDC.e (Arbitrum) 0 0 0 0 0.0 0.0 0.0 0.0 0 0 0.0 0.0 0.0
Compound III USDC (Ethereum) 257.4 100.0 151 71 22,651.2 8,800.0 1.7 0.7 13,288 6,248 1.0 0.5 11,915.2
Compound III USDC (Arbitrum) 20 20 17 8 1,760.0 1,760.0 2.3 2.4 1,496 704 2.0 1.0 1,320.0
Compound III USDbC (Base) 30 15 9 4 2,640.0 1,320.0 6.8 3.7 792 352 2.0 1.0 2,816.0
Compound III USDC (Polygon) 34.7 34.7 16 7 3,053.6 3,053.6 4.4 4.8 1,408 616 2.0 1.0 4,083.2

The reward changes are aimed to update the Recommended Supply APY to 1% and Recommended Borrow APY to 0.5% in the Ethereum v3 USDC comet, and set the Recommended Supply APY to 2% to Recommended Borrow APY to 1% in the other USDC comets. These changes result in the following savings:

Aggregate Savings

  • Aggregate Daily USD Savings for All Markets: $20,134
  • Aggregate Annual USD Savings for All Markets: $7,349,056
  • Percentage Decrease in Total USDC Rewards: 44.7%

IR Curve Recommendations

Gauntlet also recommends setting the USDC comet IR curves to the following parameters:

Parameter Recommended Value
Annual Supply Interest Rate Base 0
Annual Supply Interest Rate Slope Low .056
Supply Kink .9
Annual Supply Interest Rate Slope High 1.909
Annual Borrow Interest Rate Base .015
Annual Borrow Interest Rate Slope Low .06111
Borrow Kink .9
Annual Borrow Interest Rate Slope High 2.3

The recommended IR curve has a 90% kink, corresponding to 5.04% supply APR and 7% borrow APR. The IR curve has positive reserve growth above 67% utilization.

Next Steps

  • Target on-chain vote 3/18/24

Thank you @Gauntlet for putting together these recommendations.

Compound may benefit by excluding the Arbitrum USDC market from this proposal as its liquidity is extremely low. It seems potentially going in the other direction to bring it in line could make sense.

I’ve analyzed Net Borrow APR across the markets and my findings are below.

Base USDC: -10.38%
Ethereum USDC: -9.39%
Polygon USDC: -11.87%
Arbitrum USDC: -22.26%

Sincerely,
Cameron

Can you explain how you came to the 5.04% supply/7% borrow APR targets?

Thanks for the feedback @cmrn.
Our approach involves initially using incentives to boost a comet’s TVL and then gradually decreasing these rewards as the market becomes self-sustaining. We prioritize adjusting the IR curve to promote stable utilization, particularly at the kink point. Considering the maturity of the Arbitrum USDC market relative to the forthcoming USDT markets, we aim to lower rewards and align the IR curve with long-term market balance, proposing a borrow APR increase at the kink to 7%.

While Arbitrum USDC currently shows the highest borrowing demand, this level may not persist. However, if demand remains high, especially across all comets, we will recommend further increasing the borrow APR from the proposed 7% to better match market equilibrium. Given the time required for governance proposals and the community’s preference for incremental changes, plus the protocol’s efficiency and reserve growth benefits from higher utilization with v3 IR curves, we proposed a gradual adjustment. However, should heightened demand persist, and the community favors more drastic adjustments, we will then recommend more significant modifications, such as raising the borrow APR at the kink to 9-10%, which is more in line with the current heightened demand.

@tempail, the 7% borrow APY target is set as an incremental increase to the heightened demand, and the 5.04% supply APY is set as a function of the ~20% implied reserve growth at the kink.

2 Likes

Thank you @Gauntlet for the additional context.

Although the points you’ve raised remain at odds with the DAO’s interest to attract liquidity, I do find them informative and sincerely appreciate your response. From the community POV, it would bring great clarity to understand why this effort takes priority over attracting liquidity in an underserved market.

@bryancolligan and @sharp’s work on the Arbitrum LTIPP grant may do the trick as well.

Sincerely,
Cameron

[Gauntlet] IR Recommendation Update

Given the even greater demand of late within Compound Comets and greater defi ecosystem to borrow USDC, we recommend updating the USDC IR curves to set the Supply APR to 6.75% and Borrow APR to 9% at the 90% utilization kink. Additionally, we recommend increasing the post-kink APR slopes so that the Borrow APR at 100% utilization is > 50%, in order to prevent liquidity crunches at high utilizations. The corresponding IR curve and corresponding reserve growth are shown below:

Specification

Parameter Recommended Value
Annual Supply Interest Rate Base 0
Annual Supply Interest Rate Slope Low .075
Supply Kink .9
Annual Supply Interest Rate Slope High 3.6
Annual Borrow Interest Rate Base .015
Annual Borrow Interest Rate Slope Low .0833
Borrow Kink .9
Annual Borrow Interest Rate Slope High 4.3

Next Steps

Based on current market conditions, Gauntlet will submit this proposal on-chain on 03/12/24.