one thing that @ignaciorsg.eth and I were chatting about is that even during a guarded launch, it’d be nice if Coinbase could provide some sort of backstop - e.g. a standing onchain bid for cbETH at the oracle price minus whatever the discount might be when the protocol has to sell collateral to replenish the base asset. Not sure what their appetite is to do that (or what the technical implementation might look like), but figured I’d throw it out there. Also totally open to hear other ideas to that end.
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With Compound III (unlike prior versions) illiquidity is not a significant obstacle to supporting an asset, due to the presence of supply caps. For any non-major asset, the question should be, “how much cbETH can be safely supported, and at what risk parameters?”
I’m excited for Gauntlet to provide this risk analysis for the community.
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Hello @jared, thank you for the proposal. I am curious to better understand the route Compound III is taking here.
First, I thought Compound II and Compound III had very little overlap: Compound II would enable an interest rate market for a large diversity of assets, while Compound III would be a much less risky way to earn interests or obtain financing in cash (~usdc). I remember @rleshner sharing similar thoughts in a Twitter Space with Instadapp (please correct me if I misunderstood).
In your opinion, should the Compound Governance decide to deploy more and more versions of Compound III with different assets (hence overlapping with compound II)? Or should it be just for USDC and ETH (~web3 cash)?
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Any thoughts on when this analysis will be available?
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Hi @0x7751 - we are targeting in ~2 weeks, but it is dependent on several strategic decisions the community should make which would impact our recommendations. We will pose those questions to the community shortly to kickstart the conversation.
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Gauntlet would like to kickstart the conversation around an important strategic consideration for the wETH market: how would wETH supply be encouraged?
On Compound V2 markets, there is natural demand to supply wETH, given that the wETH can be used as collateral. However, this natural demand as collateral does not exist on the Comet market, as the wETH supplied can not be used as collateral. Of course, wETH supply is a limiting factor to the growth of this market.
In the case of the wETH Comet market, the yield of supplying wETH will be significantly more important to attract wETH supply than it is on the V2 market.
Although Gauntlet does not make strategic recommendations to the DAO, we wanted to kickstart the conversation, as the decisions the DAO makes here may impact our recommendations on the interest rate configuration for wETH.
Several options for the community are:
Option A: Configuring the wETH interest rate curve differently on Comet than on V2.
- Benefits: the interest rate curve can be configured to provide a higher yield to wETH suppliers on V3 to encourage supply while aiming to prevent excessive utilization.
- Tradeoffs: there is currently a scarcity of data on the elasticity of users with regard to interest rate curves.
Option B: Pause supplying of ETH on V2 to encourage supply on V3.
- Benefits: encourages migration to both the Comet USDC and wETH markets.
- Tradeoffs: there are nuanced risk tradeoffs here. For example, pausing supply of ETH on V2 prohibits borrowers from adding more ETH collateral to their positions in times of market stress.
Option C: Distribute COMP incentives on Comet (for the supply side of wETH)
- Benefits: encourages supply to wETH market.
- Tradeoffs: cost to the protocol. In addition, there is currently a scarcity of data on the elasticity of users with regard to interest rate curves. Any future COMP incentive reduction should be made gradually to not shock the market.
We look forward to hearing the community’s input. Of course, the community may choose one or a combination of the above options.
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Thanks for starting this conversation, @pauljlei!
All three approaches are suitable (and possibly necessary), but as a subjective preference, I would order them as A (at launch), C (at launch, or immediately thereaftrer), B (after V3 wETH is stable). My reasoning is as follows:
There is no downside, cost, or risk for cWETH to use a custom interest rate model that is different than the legacy interest rate model. In fact, given the starting assets and parameters, the use-case for borrowing Ether from this market (likely to efficiently apply leverage to staked Ether) will create very different rate expectations than the existing Compound protocol. There is likely significant borrowing demand for Ether (say, 2-4% APR) below the staked Ether yields (currently about 6-8% APR), and these users will likely be borrowing for extended periods of time. On the supply side, users (individuals, institutions, or other applications) may tolerate a lower yield given the liquidity of Compound markets (say, 1-3%). This market should likely have an interest rate model that targets high levels of utilization, with a ceiling on borrowing costs in line with staked Ether yields.
In regards to including WETH in the distribution of COMP, you’re right that it makes more sense to include the suppliers of Ether (and not borrowers) in this market, as borrowing will be the more “obvious” use-case, whereas USDC is the opposite (massive supply of USDC seeking yield).
Only after this market is running, at scale, would it make sense for the community to debate whether to disable functionality in the V2 protocol (though my view is, it might make sense to keep it as-is in perpetuity, just incentivize migration in economic ways).
Excited to hear others opinions and ideas.
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As you can see in charts(weth utilization rate/sthETH deposit/ETH borrow on Aave v2), utilization rate has dramatically changed after March 2022(at that period, stETH collateral supporting has been started).
So, I agree that if we add liquid staking ETH as collateral in comet, it is likely to get increased demand of borrowing ETH(mainly from dapps using liquid staking ETH strategy such as instadapp lite, rocketpool, and coinbase)
source: Ethereum ETH Staking Deposits 🥩
COMP distribution
For user groups(wstETH, cbETH, and ETH), there is a strong incentive(for borrowing ETH) to deposit their wstETH and cbETH on comet but it has not much merit for native ETH holders. So, I think that it is good idea to assign some COMP distribution for ETH deposit side.
Improved IRM
- With high utilization, it is important to keep low ETH borrowing rate level for liquid staking eth strategy players.(making maximum profit)
- Currently, I’m not sure it should be using the same IRM for both wstETH and cbETH. Because cbETH can be considered as centralized asset in the community.
comments about this topic from instadapp: https://twitter.com/smykjain/status/1590835867798892544?s=20&t=AuARy3QcguITPE4cexE0fA
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Is the analysis already available?
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Lido is really glad to see the discussion of Compound III moving forward. I wanted to hop in to mention that we have been in touch with Gauntlet to make any data needed available. We would be glad to offer our analytic team’s time and effort to the Compound community as well if there is a need/opportunity in support of this discussion.
We also have a great deal of experience in helping protocols that integrate stAssets manage supply and borrow demand. We will be happy to consult!
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Gauntlet has conducted an initial market risk analysis on the parameterization of the wETH Comet market.
stETH
Our systems observe ample liquidity in the stETH/wETH market. The slippage/liquidation curve suggests that a $130mm market sell of stETH through 1inch only incurs 1.5% slippage, implying a liquid market. We also ran simulations hypothesizing the amount of insolvencies and liquidations given various CFs and stETH/ETH deviations for accounts that have historically supplied stETH and borrowed wETH - and found that only at high deviations is there a likelihood for insolvencies.
Because of this, it can prudent to initialize the market at $100mm supply cap, 90% CF (collateral factor), 93% LCF (liquidation collateral factor), and 5% LF (liquidation factor). Combining capital-efficient borrowing parameters with a stringent supply cap will be valuable to understanding and studying the pool behavior.
cbETH
We recommend a lower supply cap for cbETH but with the consistent CF/LCF/LF parameters as wstETH.
cbETH is less liquid on DEXes compared to wstETH (1.5% slippage for $1.3mm sell of cbETH, versus $130mm sell of wstETH). cbETH is also not very liquid on CEX - where a $1mm sell incurs roughly 2% slippage. In addition, cbETH is only redeemable to locked ETH on Coinbase, whereas wstETH is redeemable to stETH, which is more easily transferable and more liquid. There exists a 2-3% discount on cbETH, perhaps due to this intransferability.
However unlikely, we may imagine a situation in which insolvency news on the CEX leads to the cbETH market rate plummeting, creating risk for Compound. Although this existential risk is neither a market risk nor a quantifiable risk, a conservative supply cap can mitigate the potential loss posed to Compound.
Specification
- wstETH: $100mm supply cap, 90% CF, 93% LCF, and 5% LF
- cbETH: $10mm supply cap, 90% CF, 93% LCF, and 5% LF
By approving this proposal, you agree that any services provided by Gauntlet shall be governed by the terms of service available at gauntlet.network/tos.
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Thanks, good question (and sorry, I’ve been away). Personally I think a USDC and ETH market both make sense on Ethereum mainnet. Beyond that, I would think the focus should be on USDC and/or native token base markets on other chains, starting with popular L2s/natively bridged chains.
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Thanks Paul and Gauntlet team for these analyses. We’ve applied the parameters suggested to the deployment and initial proposal script. There was a last-minute change to the cbETH price oracle, which is going to be posted against ETH instead of USD from here on out, so we have some price feed wrapper contracts to handle that, which ought still be audited by OpenZeppelin before deploying and launching this market.
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Hey @jared , quick drop by to check how are we doing w the deployment?
Are we close, and have a launch date estimation?
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Hey Frank, we are still awaiting audit of the price feed changes, and overall feedback on the deployment from OpenZeppelin. At the same time, we discovered an issue with the deployment tooling that will end up deploying a different Configurator/Rewards contract than cUSDCv3, which we want to reuse, so we are making a change to support that. I’m not sure which of these things will finish first, and we are also in prime holiday season, but we should be very close! I would guess a few more weeks.
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Summary
Below are Gauntlet’s initial recommendations on interest rate curves for the WETH Comet for Compound III.
wstETH/cbETH supply → 0% (standard)
WETH borrow
Utilization 0% → 1% APR
Utilization 90% → 5.2% APR (match stETH stake rate)
Utilization 100% → 10.4% APR (double stETH stake rate)
Linear in between
WETH supply
Utilization 0% → 0% APR + COMP incentive
Utilization 90% → 1.7% APR + COMP incentive
Utilization 100% → 7.8% APR + COMP incentive
Linear in between
Recommendation Specification
borrowKink = 900000000000000000
borrowPerSecondInterestRateBase = 315360530
borrowPerSecondInterestRateSlopeHigh = 16398720000
borrowPerSecondInterestRateSlopeLow = 1639871893
supplyKink = 900000000000000000
supplyPerSecondInterestRateBase = 0
supplyPerSecondInterestRateSlopeHigh = 19236960000
supplyPerSecondInterestRateSlopeLow = 536111569
Note that these numbers will differ slightly from the APR numbers because of compounding interest in blocks.
Methodology and Rationale
Some core assumptions to this recommendation are that 1.) stETH has an annualized yield of approximately 5%, 2.) the current utilization statistics of the Compound II ETH market are based on the fact that there is no strong use case for borrowing ETH and not that the interest rates are too aggressive, 3.) the Compound III USDC Comet provides reasonable data points, but the WETH Comet will have a significantly different use case, 4.) users will be elastic with regards to interest rate changes around the boundary of stETH annualized yield.
Current USDC Comet IR curves
Since the WETH borrowed cannot be used as collateral, there is less market risk concerning WETH liquidations, and thus there is less need to make the max interest rate especially high.
By approving this proposal, you agree that any services provided by Gauntlet shall be governed by the terms of service available at gauntlet.network/tos.
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This might be a silly question, but per the USDC IR Curves, how is the USDC supply interest rate higher than the USDC borrow interest rate at 100% utilization?
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Hello @pauljlei !
If my calculations are correct, with the curves you are proposing the implicit reserve factor at 90% utilization would be 70% (and 53% at half utilization).
This instance of Compound III is very promising and could have a real organic traction without any rewards, with small reserve factors (see the metrics of stEth/Eth on Aave, Morpho-Aave, Euler…). It don’t understand why it should depend so much on COMP rewards.
Is the goal of this to profit from COMP distribution to increase the reserve of the Compound DAO? In this case, it should at least be explicit, in order for the community to discuss about it, especially if the reserve factor is so high.
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The logic surrounding borrowing costs makes sense, @pauljlei.
I agree with @MathisGD that the implicit reserve factor could be significantly lower (e.g. interest rates across utilization rates could be higher); one of the original concerns with the market would be that native ETH suppliers would have below-average incentives to participate (vs, staking their Ether natively via proof of stake).
Are there other models that maintain positive implicit reserve factors, simply by adjusting supplyPerSecondInterestRateSlopeLow?
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Thanks all for the feedback - relayed to our team and will come back here.
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