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.