Aave

Simple Summary

This proposes raising the maximum AMPL interest rate to better balance incentives between the borrow and deposit sides of the market.

Motivation

Following API-12, AMPL borrowing & depositing went live on the AAVE v2 market [date=2021-07-24 time=20:22:00 timezone=“UTC”].

Since then, there has been a near 100% utilization rate of deposited assets. This suggests the maximum cap of the interest rate curve is not able to reach a high enough value to effectively balance incentives between the borrow side and depositing side of the marketplace.

While the AMPL spot market is currently in a relatively extreme condition, the AAVE borrowing market should be able to perform efficiently in all market scenarios.

Specification

We suggest the following parameters for AAVE’s default interest rate model:

• Optimal utilization = 75%
• Slope1 = 2%
• Slope2 = 10,000%

This leads to a piecewise linear curve with two parts and three defining points:

• Borrow Interest(0) = 0% APY
• Borrow Interest(75) = 2% APY
• Borrow Interest(100) = 10002 % APY

Rationale

A higher cap of the borrow interest rate will allow the marketplace to have a more sustainable equilibrium.

Since this will result in overall higher fees coming into the system, in tandem we also suggest lowering the reserve factor from 20% to 10% to incentivize more depositors. This would be submitted as a separate AIP to decouple these two decisions.

We believe a nonlinear interest curve is healthiest long-term and could likely be used by many other assets as well, however this work can be discussed more in the future.

Implementation

A deployment of the existing implementation of the Interest Strategy will be used, with the following parameters:

optimalUtilizationRate: new BigNumber(0.75).multipliedBy(oneRay).toFixed(),
baseVariableBorrowRate: new BigNumber(0).multipliedBy(oneRay).toFixed(),
variableRateSlope1: new BigNumber(0.02).multipliedBy(oneRay).toFixed(),
variableRateSlope2: new BigNumber(100).multipliedBy(oneRay).toFixed(),

https://etherscan.io/address/0x509859687725398587147Dd7A2c88d7316f92b02#readContract

Copyright

Copyright and related rights waived via CC0.