---

title: [ARFC] BAL Interest Rate Curve Upgrade Author: @Llamaxyz @MatthewGraham @scottincrypto Dated: 2022-12-17 (updated)

---

Simple Summary

@Llamaxyz presents a proposal to amend BAL interest rate parameters on the Aave Ethereum v2, Ethereum v3 (when deployed), Polygon v3 and Polygon v2 Liquidity Pools.

Abstract

There is currently a high demand for borrowing BAL (interest rate = 28.18% on Polygon v3) across all Reserves. The BAL liquidity pools offer poor capital efficiency, with the utilization of the Reserve (48.27% on Polygon v3) often near the Optimal point of 45%.

By changing the interest rate curve across all three active Liquidity Pools, this proposal is expected to improve capital efficiency by lowering interest rates on markets where borrowing is disabled and enticing capital to move to where borrowing demand generates an attractive yield. This is expected to generate more revenue for the DAO and generate significant capital efficiency within the BAL Reserves.

Due to the ongoing incentives offered by Aura Finance, any new deposits are expected to be borrowed. Users are able to borrow and deposit BAL into Aura Finance’s staking contract to earn a yield of around 45% at the time of writing. This creates an arbitrage opportunity of 16.82% taking into account the liquidation risk, auraBAL peg and additional Smart Contract risk.

Motivation

Users are expected to continue borrowing BAL to earn yield whilst interest rates permit and, in doing so, will create ongoing borrowing demand for BAL. Changing the interest rate curve by amending the Uoptimal parameter from 45% to 80% will improve the capital efficiency of Reserves. However, with borrowing disabled on some Aave deployments, lending rates will drop and it is rational for profit driven actors to transition liquidity to the Reserve that offers the greatest yield.

The three charts below show the most recent 5 month historical BAL interest rate across each BAL Reserve. The interest rate at the current Optimal point is 7%, which is low relative to current demand of 28.18% on Polygon v3. This proposal recommends increasing the interest rate (slope 1 parameter) to 14% which is a 100% increase to the existing rate. Over time, we will be able to monitor the Reserve and amend the slope 1 parameter in an attempt to keep the utilization beneath the Optimal point for the majority of the time.

In addition, this proposal introduces a base rate of 3% and changes slope 2 from 300 to 150. This means at 0% utilization, the interest rate for borrowers is 3% and the gradient post-Optimal point is reduced, resulting in a less volatile interest rate for users with increasing utilization. The result will be a BAL interest rate similar to the SNX interest rate curve which has a base 3%, slope 1 12% and slope 2 100%.

The graphic below shows the changes in the interest rate.

Utilization of the liquidity in the Reserve is expected to increase from 45% → 73.33% assuming users can borrow BAL and are willing to pay an interest rate of 13%, which is less than the current borrowing rate of 28.18%. With a borrowing cost of 14% at the Optimal point, depositing BAL into Aura Finance’s auraBAL staking contract or B-80BAL-20wETH / auraBAL gauge will remain lucrative for users. If the utilization exceeds the Uoptimal point, a follow up proposal will propose increasing the interest rate further.

The improved capital efficiency of the BAL Reserve is expected to lead to an increase in BAL liquidity on-chain. The more on-chain liquidity there is, the more expensive it is to manipulate an oracle feed. Based upon the @ChaosLabs Borrow Cap formula, Llama proposes increasing the Borrow Cap on the Polygon v3 from 96,798.00 units to 256,140.00 units.

With respect to the Polygon v3 deployment, assuming the BAL Reserve remains at $979,230, the revenue generated at the Optimal point for the DAO will increase from $6.17k to $20.4k, or 230%. The Reserve utilization increases from 45% to 80%, which reduces the amount of unused BAL by 63.6%. This will provide a significant increase in capital efficiency.

Specification

The below table shows the current and proposed changes to the BAL Interest Rate on Ethereum v2, Polygon v2 and Polygon v3.

Parameter	Current (%)	Proposed (%)
Uoptimal	45	80
Base	0	3
Slope1	7	14
Slope2	300	150
Reserve Factor	20	20

The below shows the proposed changes to the Borrow Cap on Polygon v3.

Polygon Parameter	Units
Supply Cap	284,600 (no change)
Borrow Cap	256,140

Borrow Cap is calculated: (Uoptimal + 0.1) x SupplyCap (0.8+0.1) x 284,600 = 256,140

Copyright

Copyright and related rights waived via [CC0(https://creativecommons.org/publicdomain/zero/1.0/).