Summary
Gauntlet recommends updating the IR Curves for all WETH comets to increase the borrow APR at the kink from 2.2% to 2.3% to better tune the comet to market rates as well as increase the kink from 85% to 90%. Furthermore, Gauntlet recommends revising Daily COMP Rewards to better adjust for incentive spend relative to borrowing and curb the high incentive spend per dollar borrowed. The below visualizations elucidate the analysis further.
Specification
Ethereum, Arbitrum & Optimism WETH Comets
| Parameter | Current Value | Recommended Value |
|---|---|---|
| Annual Borrow Interest Rate Base | 0.01 | 0.01 |
| Annual Borrow Interest Rate Slope Low | 0.014 | 0.0145 |
| Borrow Kink | 0.85 | 0.9 |
| Annual Borrow Interest Rate Slope High | 1.15 | 1.5 |
| Annual Supply Interest Rate Base | 0 | 0 |
| Annual Supply Interest Rate Slope Low | 0.0185 | 0.0165 |
| Supply Kink | 0.85 | 0.9 |
| Annual Supply Interest Rate Slope High | 1 | 1.2 |
Base WETH Comet
| Parameter | Current Value | Recommended Value |
|---|---|---|
| Annual Borrow Interest Rate Base | 0.006 | 0.01 |
| Annual Borrow Interest Rate Slope Low | 0.0125 | 0.0145 |
| Borrow Kink | 0.85 | 0.9 |
| Annual Borrow Interest Rate Slope High | 0.9 | 1.5 |
| Annual Supply Interest Rate Base | 0 | 0 |
| Annual Supply Interest Rate Slope Low | 0.0115 | 0.0165 |
| Supply Kink | 0.85 | 0.9 |
| Annual Supply Interest Rate Slope High | 0.8 | 1.2 |
| Comet | Current COMP Supply Rewards | Recommended COMP Supply Rewards | Current COMP Borrow Rewards | Recommended COMP Borrow Rewards |
|---|---|---|---|---|
| Ethereum WETH | 35 | No Change | 20 | 15 |
| Arbitrum WETH | 6 | No Change | 15 | 10 |
| Base WETH | 6 | No Change | 2 | 1 |
Analysis
Utilization in many WETH comets has gone above the kink at multiple points in time. To address this, we recommend updating the IR Curve to increase the borrow APR at the kink from 2.2% to 2.3% as well as increasing kink from 85% to 90%. The recommended interest rate curve and implied reserve factor are shown below.
At the 90% kink, the Borrow APR is 2.30% and the Supply APR is 1.61%. Furthermore, we recommend reducing borrow side incentives to further curb high utilization and enable market to reach interest rate discovery.
Ethereum
Historical Net Borrow APR
Historical Utilization
On the Etherum WETH Comet, Utilization has consistently fluctuated between 84% and 86%, representing the highest duration within this band. The median utilization rate is approximately 85%, aligning with the platform’s kink. The Net borrow APRs has also ranged the most between 1-2% with a median of 1.8%. The proposed increase in borrow APR would imply a Net Borrow APR of 1.95%, which remains within the interquartile range.
Ethereum - WETH incentive cost per dollar borrow
Arbitrum
Historical Net Borrow APR
Historical Utilization
On the Arbitrum WETH Comet, the utilization has ranged between 85-90% for the longest duration with a median being at ~81.5% (lower than kink). The Net borrow APRs has also ranged the most between 0-2% with a median of 1.6%. The proposed increase in borrow APR would imply a Net Borrow APR of 1.7%, which is bounded by the interquartile range.
Arbitrum - WETH incentive cost per dollar borrow
Base
Historical Net Borrow APR
Historical Utilization
Furthermore, in the Base WETH Comet, the utilization has ranged between 86-88% (higher than kink) for the longest duration with a median being at ~81.5% (kink). The Net borrow APRs has also ranged the most between 1-2% with a median of 2.4% (Higher than borrow APR at kink). The proposed increase in borrow APR would imply a Net Borrow APR of 1.75%, which falls within the interquartile range.
Base - WETH incentive cost per dollar borrow
Optimism
Historical Net Borrow APR
Historical Utilization
Similarly for Optimim WETH instance, the utilization has ranged between 85-90% (higher than kink) for the longest duration with a median being at ~85.5% (> kink). The Net borrow APRs has also ranged the most between -2-0% with a median of 0.3% (lower than borrow APR at kink). This can be attributed to COMP incentives inverting the net borrow APR below 0. The proposed increase in borrow APR would imply a Net Borrow APR of 0.74% and further help inverting the borrow APRs above 0.
Next Steps
Target on-chain proposal 9/30/24