Background
The Reserve Factors of supported markets are inconsistent, and have evolved through a variety of governance proposals and new market launches.
Reserves are taken out of interest paid by borrowers, and reduce the corresponding supply interest rate in the market. Reserves accumulate in each cToken contract, and can be deployed by the Governance process for any variety of use-cases.
Current Reserve Factors
USDC: 5%
USDT: 20%
DAI: 5%
ETH: 10%
WBTC: 10%
BAT: 50%
ZRX: 50%
UNI: 20%
COMP: 20%
Philosophy
Reserve Factors have been a long-standing discussion in Discord, and there are a variety of lenses through which to view them. Historically, discussion has centered around:
- Reserve factors are the protocol’s fee to offset risk (which is incurred when there is borrowing outstanding)
- Reserve factors incentivize behavior, by acting a component of interest rate models
- When reserves are large relative to borrowing demand, reserves functionally add liquidity to a market
Changing Reserve Factors does not immediately change the risk of the protocol (compared to changing a Collateral Factor), which should make them flexible levers to consider adjusting.
Potential Approach for Discussion
Reserve Factors should be standardized in a consistent format–just as interest rate models have begun becoming standardized across markets. By using the risk associated with borrowing the asset as a parameter (e.g. volatility of the asset), we have a starting point to frame new reserve factors.
I would suggest (and love everyone’s feedback on), the following Reserve Factors:
USDC: 5%
->
7.5%
USDT: 20%
->
7.5%
DAI: 5%
->
10%
ETH: 10%
->
20%
WBTC: 10%
->
20%
BAT: 50%
->
25%
ZRX: 50%
->
25%
UNI: 20%
->
25%
COMP: 20%
->
25%
These create sequentially higher Reserves from borrowing stablecoins, to semi-volatile stablecoins, to large liquid collateral, to more volatile collateral assets. Going forward, as new assets are added to the protocol, they could follow this format as well.