[RFC] Compound Rate Stabilization Vault

[bryancolligan]

TLDR:

Utilization Rates are too high, and ETH Borrowers on Mainnet are withdrawing their capital to pursue better rates.

• Depositors are looking to unwind positions as they are losing token.

Borrow costs are too high for their strategies to be profitable, and Competitors are offering borrow rates of 2.72%.

Here are three high level solutions:

1. Programmatically Adjusted Incentives. Reduce Incentives for Borrows above kink utilization rate.
2. List COMP as collateral on every market.
3. Build Compound Owned Vaults which facilitate automated cross-chain, interest rate arbitrage.

Implementing these strategies will benefit both COMP holders, and provide rate stabilization for markets.

1. Reduce Borrow Incentives

Compound is currently spending $45,000 in daily issuance to incentivize borrowing and lending.

We have high utilization rates across the board, and need systemic solutions to challenge this problem. The first step is reducing Borrow Incentives to 0% when markets are above kink utilization.

We are overpaying to incentivize Borrowers.

AlphaGrowth has nearly 1M in OP incentives, ready to distribute to strategically incentivize TVL on Optimism – and we will end up spending most of it on Supply because utilization is too high to do anything else.

The speed at which governance can respond is not fast enough to keep up with the market, and as we head into the bull market, incentivizing the borrow side makes no sense.

Our objective ought to be to increase market capacity, while retaining 85% or higher utilization, so we can minimize emissions, and stabilize borrow rates.

2. COMP as Collateral on Every Market.

COMP Everywhere was proposed a couple weeks ago on the Forums:

• Source: COMP Everywhere

Given our need to create an equilibrium of rates across market arbitrage opportunities, COMP Everywhere has become a more pressing solution.

When COMP is listed as collateral on every market and chain – COMP holders will be able to gain yield by helping to stabilize rate inefficiencies in Compound Markets.

WOOF is building a Position Migrator which helps users find better rates, and migrates their positions to secure those rates. PALOMA previously built Multichain Migration Bots to utilize USDC across four chains for Compound. Compound Multichain Migration Bots for ETH & USDC Markets on ETH, BASE, ARBITRUM

AlphaGrowth is looking to expand this Position Migrator and Multichain Migration Bots to create a vault for Automated Cross-Chain Interest Rate Arbitrage.

COMP holders can supply COMP as collateral into an Arbitrage Vault, and help close the delta between markets on different chains. The high level flow is as follows:

1. Event occurs where a significant interest rate difference between a Lend and Borrow Rate on base asset markets such as USDC or ETH is available.
2. COMP will be supplied on the lower rate market and borrow the base asset(USDC,ETH) on chain A.
3. Vault will then bridge base asset(USDC,ETH) to chain B
4. Vault on chain B will lend base asset(USDC,ETH) into higher rate market
5. Listener will monitor rates until Arbitrage is no available and will kick off unwind scenario.
6. Upon flat or negative rate the vault will calculate and communicate unwind the lend of the base asset(USDC,ETH) on chain b.
7. Vault will bridge base asset(USDC,ETH) back to chain a.
8. Vault will repay the borrow on chain a.

The results are:

1. Automated Cross-Chain Arbitrage Opportunities for COMP holders.
2. Cross-Chain Market Equilibrium.

3. Automated Cross-Chain Interest Rate Arbitrage

The modified dashboard below shows an example of these market inefficiencies at work:
.

While the example above only uses Optimism and Mainnet - we can implement these cross chain vaults on all markets. New Chain Deployments will benefit in demand and Yield, and Mainnet Markets will have their supply needs balanced.

The objective is to lower utilization until it backs off of the Kink, while providing an easy way for COMP holders to help discover utilization equilibrium across chains.

We can include this strategy on all current, and upcoming deployments.

Interest Rate Arbitrage as Structured Products:

These vaults are structured to focus on accumulation – meaning success is defined by accumulating more of the deposited asset.

We are calling this style of Vault “X on Y”, meaning Y is deposited, and the user is earning X on their deposit at some APR.

• COMP on COMP
• USDC on COMP
• USDT on COMP
• ETH on COMP

COMP on COMP is the most interesting, because we are pulling yield out of inefficiencies in Compound Markets, and giving it to COMP holders, while improving the market rates for everybody else.

You can think of this entire mechanism as a Stability Module, coupled with native yield for COMP.

Summary

When an opportunity is available within Compound Protocol, COMP holders ought to benefit from, and be involved in that solution.

The following are systemic design choices which open up a better way to run the protocol:

1. Lower Borrow Incentives to 0% when Market Utilization is above 85%.
2. List COMP as Collateral on Every Market.
3. Build and Launch a series of Automated Cross-Chain Interest Rate Arbitrage Vaults.

Our belief is that these are steps which lead toward more utility for COMP, and more efficient markets.

[dmitriywoofsoftware]

WOOF! totally supports the idea of giving COMP tokens more utility. Also, giving lenders and borrowers a more stable rate can ensure more sticky TVL and build even more structured products such as wstETH looping. Unfortunately, this is not possible as the market is experiencing huge APR volatility. One more idea as the vault is successfully built is to add some hedging strategy as we will give COMP on COMP and users without COMP would like to earn yield which will lead Compound to create a COMP-base market.

WOOF! would like to support Gauntlet with decreasing incentives if some analytics is required.

WOOF! would like to support AlphaGrowth with building PoC of logic with backtesting.

It would be great to hear more feedback from the community about their thoughts on such a RFC.

[robinnagpal]

This could be one of the best UX enhancements for users, and help maximizing the utility of the COMP token.

By creating a wrapper around COMP and integrating it with a solution like CCIP, we can simplify moving lending and borrowing tokens (with COMP) across chains.

This feature will help token holders secure the best rates without the hassle of manually moving positions—especially useful for small positions where it’s inefficient/costly, and for larger whale positions where it’s cumbersome.

At DoDAO, we’d be excited to support the multi-chain PoC development efforts. We’ve previously collaborated with @dmitriywoofsoftware on a couple of initiatives and would love to work on this as a team as well.

[platonia]

The proposal outlines three high-level solutions to address rate stability. In this analysis, we evaluate the primary goals articulated in the proposal and assess the feasibility of the proposed mechanisms. Our focus will be on interest rate dynamics (e.g., utilization, borrow rate) rather than COMP-specific utility considerations.

Utilization Rate & Borrow Rate Stability

Under Compound’s kink-based interest rate model, when utilization exceeds the “kink” point, the borrow rate increases at a significantly steeper slope compared to utilization below the kink. This can lead to high borrow rate volatility during periods of high utilization, even with minor fluctuations in utilization.

To stabilize rates, it’s important to distinguish between persistent (structural) and transient high utilization. Persistent high utilization often indicates strong borrower demand for leverage during bull markets, and traders accept higher funding rates to maintain leveraged positions. This dynamic was evident in Q1 and November-December 2024, where rising borrow rates coincided with sustained high utilization.

Source: DefiLlama USDC(Compound V3 - Ethereum)

Source: Coinglass Perps Funding Rate Heatmap

Several solutions can address rate volatility due to the structurally persistent high utilization:

• Increase the rate at kink (borrowPerSecondInterestRateSlopeLow and supplyPerSecondInterestRateSlopeLow) or raise the kink (borrowKink and supplyKink)
• Increase the incentive for supplying the base asset or reallocate the incentive from borrowing to supplying the base asset

However, these adjustments do not completely eliminate rate volatility—they merely reduce its magnitude. Overly aggressive kink rates risk lowering the pool’s capital efficiency (e.g., underutilized liquidity) and reducing protocol revenues, so this is a delicate balancing act.

Reducing Borrow Incentives to 0% Post Kink

Gauntlet’s recent interest rate change proposal recommends a post-kink slope of 1.26 for ETH and 3.4 for USDC. This means that a 1% increase in utilization above the kink would increase the annual borrow rate by 1.26% for ETH and 3.4% for USDC. By comparison, the current borrow incentive are 0.39% for the ETH market and 0.41% for the USDC market. To contextualize the relative impact: reducing post-kink borrow incentives has a similar impact to a 0.1-0.3% utilization fluctuation under the proposed curve.

Additional factors, such as borrower responsiveness (elasticity of demand), further influence outcomes and warrant deeper analysis. While we agree with the direction of reducing post-kink borrow incentives, the actual effect remains uncertain due to these variables. We encourage readers to interpret the data with these nuances in mind.

Governance Bottleneck

As evidenced by the December 7’s Gauntlet Interest Rate Proposal, which is just passed, the pace of governance is not ideal for responding to rapidly shifting market dynamics. To address this, we propose two options for adjusting incentives:

• Bypass Governance Voting with Guardrails
  • Delegate limited permissions to the service provider for incentive adjustments within predefined bounds (e.g., ±20% COMP emissions). This approach retains human oversight to account for complex factors such as borrower demand elasticity, while bypassing full governance cycles for urgent changes.
• Programmatic Incentive Adjustments
  • Automate incentive adjustments using a kink-based model that mirrors Compound’s existing interest rate curve. Under this system, incentives would dynamically rebalance between borrowing and supplying based on utilization: more incentive for borrowing when utilization is low (to stimulate demand) and for supplying when utilization climbs (to stabilize liquidity). This avoids sudden incentive cuts and organically aligns incentives with market conditions. However, parameterizing such a model requires deeper research into borrower elasticity (e.g., how demand responds to rate hikes) to avoid unintended consequences.

Cross-Chain Rate Disparities

Rate disparities naturally exist across chains and protocols, even when the lending pools share similar configurations. While building Compound-owned vaults to automate cross-chain arbitrage is conceptually appealing and could enhance user experience, existing arbitrageurs likely haven’t capitalized on these opportunities due to:

• Inventory Risk: Unlike atomic liquidations where liquidators face minimal inventory risk, rate arbitrageurs take on inventory risk because the transaction executions are not atomic.
• Inadequate Profit Margins: After accounting for borrowing fees, gas costs, bridging fees, and development overhead, arbitrage can yield negligible or negative returns.
• Transient Opportunities: profitable opportunities may disappear and the spreads may narrow before the positions are settled.

Before building the vaults, we should assess whether arbitrageurs are absent due to structural unprofitability or other operational hurdles. We recommend:

• Conduct a quantitative analysis to model historical rate gaps against execution costs.
• Piloting a minimum viable arbitrage vault to test feasibility if the development costs are manageable.
• Publishing a transparency dashboard that tracks profit/loss metrics to validate assumptions.

Key Takeaways

Adjusting the interest rate curve stands out as the most effective solution to stabilize borrow rates, which is being addressed in Gauntlet’s proposal. By increasing the pre-kink slope, rates will rise faster as utilization rises, preemptively discouraging excessive borrowing before utilization reaches volatile post-kink levels. To potentially increase the impact further, pair curve adjustments with incentive adjustments to incentivize certain behaviors. Cross-chain arbitrage vaults, while promising, their development costs must be validated against potential protocol benefits and execution risk.