Compound

In a recent proposal, blck proposes raising the Reserve Factor on USDT from 0% to 10%. We support blck’s proposal because we agree that the Reserve Factor needs to increase. But we do not think Proposal 8 goes far enough. We propose raising the Reserve Factor to 20% (from either 0% if blck’s proposal fails, or 10% if it succeeds).

Background on Reserve Factor

The Reserve Factor in Compound is the parameter that controls how much of the interest for a given asset is routed to that asset’s Reserve Pool. The Reserve Pool protects lenders against borrower default and liquidation malfunction. For example, a 5% Reserve Factor means that 5% of the interest that borrowers pay for that asset would be routed to the Reserve Pool instead of to lenders.

Thus, as a market grows, it is important that the Reserve Pool grow commensurately in order to adequately protect lenders.

Why 10% is too low for USDT’s Reserve Factor

We believe there are two reasons for raising the Reserve Factor to 20% (vs. 10%).

As has been discussed at length in the Compound Discord’s #governance channel, the USDT market is being manipulated by COMP token harvesters, taking advantage of the interest rate model of USDT to generate COMP for themselves. A 20% Reserve Factor will remove 20% of the incentive, reducing the “earned interest” for lenders and thus their incentive to game the system.

In the long-run, it’s likely that 20% is too high to be sustainable. But we believe that it will rapidly address the incentive gaming currently taking place, and if 20% does end up being too draconian, we will address that by reducing the Reserve Factor in the future.