I wanted to bump this thread because I think it is an ongoing thorn in Compound’s side. Currently cCOMP borrow has a yield -7.36% and due to the borrow limit, this market is well outside the bounds of its natural equilibrium. The unique part about cCOMP market is that the supplemental distribution is paid in its native asset. While this is obvious, the implication is that this market should be the most efficient at reaching market equilibrium because its yield has zero-price risk (assuming adequate collateral), unlike other markets where there is COMP price risk that must be accounted for.
The major risk at play in this discussion is a malicious actor borrowing large amounts of COMP and then making and/or voting on proposals that may not be in the best long-term interest of the protocol. The borrow CAP is our main deterrent from this sort of actor and in a functioning market, an increasing interest rate would also act as such.
The following are the options I have considered to fix this market: Increase Borrow Cap, Raise Interest Rates, Remove/Lower COMP Distribution
Increase Borrow CAP:
Increasing the COMP borrow cap could help to mitigate the issue, however there is still a risk that we hit the new borrow cap immediately and are in the same situation. See below for the analysis… For the increased borrow cap to allow for positive borrow yield in excess of the supply yield, the CAP would have to be increased to a value far greater than the community might be comfortable with.
If you look at our current situation (~100k COMP Borrow CAP), in order to achieve a net zero interest rate, we will need the supply to decrease by roughly 5x to achieve a utilization ratio of ~80%.
An increase in Borrow CAP to 150k COMP would still require the amount of COMP to supplied to decrease in order to have a net zero interest rate.
An increase to 200k COMP would be able to achieve market equilibrium (as per my definition) assuming no change in COMP supplied. Additionally, the supply net interest rate at the breakeven point (~1.1 million COMP) would be ~1.36% which is far less than the current 2.98%. Essentially, it is unlikely that the supply will grow to levels that cause the borrow rate to go negative because the interest rate will be far too low to support that value.
Raise Interest Rates:
One relatively simple fix that I have not seen mentioned is simply increasing interest rates on the cCOMP token. The only parameter I would suggest changing is the 0% utilization rate, due to the already high interest rate model of cCOMP. However, this “fix” will not effect any real change in alleviating the issue at hand unless it is done in tandem with one of the other solutions.
Remove/Lower COMP Distribution:
This is by far the easiest fix, as setting the distribution to zero would fix all issues immediately. However, this is probably not ideal since the entire point of distributing COMP is to reward the users of the protocol and incentivize activity.
Conclusion:
I propose that the cCOMP borrow CAP be increased to 200k COMP. The additional 100k COMP does pose a risk to the protocol in that a malicious actor could create a proposal with that borrowing but is enough to have meaningful influence on its passage. This activity is mitigated by allowing the cCOMP market to achieve a net positive borrow rate (by making the malicious attack costly). 200k COMP Borrow at the current supply of ~550,000 COMP would result in a net borrow rate of ~6.9% (12.91% Borrow Rate - 6.00% COMP Distr.). While this rate is not exorbitantly expensive, it is better than a negative rate and has a real economic cost if amount borrowed reaches the CAP. Having properly functioning markets, especially for the protocol’s governance token, is very important for Compound’s long-term success.
What does everyone think? Do any additional scenarios need to be explored? If we can achieve consensus on the forum, we could try to enact this change in the AAVE,SUSHI,etc market addition proposal that is upcoming from @getty and team.
