Happy to see that the merge went through without a hitch! While Compound didn’t see as high of interest accrual as certain other defi lending protocols, I think being the only major protocol that maintained ETH liquidity through the entire process is a huge win.
Some thoughts on ideal parameter setting for the v2 ETH market going forward:
I think it makes sense to maintain the ETH borrow cap as is, or even to consider a somewhat lower level based on demand. ETH borrowings briefly hit the 100k ETH borrow cap, but have now declined back towards normal levels. The borrow cap provides a second layer of defense to users and the protocol against potential technical or asset specific risks that could drain borrowable ETH liquidity and collateral value from the protocol. In the long run, I think the best course of action would be to implement borrow cap automation similar to MakerDAO’s debt ceiling instant access module feature implementing a maximum borrow cap, as well as a target amount of available borrowable liquidity for each asset. This would help mitigate black swan risks without excessive governance overhead or impact on user experience.
I’d prefer to switch to a new jump rate model instead of reverting to previous straight line rate model. The old rate model topped out at around 15% borrow rate, which may not be enough to prevent full utilization of liquidity in stressed conditions. A jump rate model would allow for safety against illiquidity risk, while allowing for significant borrow usage (particularly if Compound v2 adds support for ETH staking derivatives such as stETH or rETH). The following parameters seem appropriate for a long term ETH rate model:
- Borrow rate at 0% utilization: 0%
- Kink: 80% utilization
- Borrow rate at kink: 3% (or roughly 0-1% below expected ETH staking rewards rate)
- Borrow rate at 100% utilization: 100%
I don’t think there’s any strong reason we should anchor to prior ETH market parameters, which had been unchanged since early days of Compound v2.