Motivation
Interest rates have stayed at or above 80% for the past several months. This has a number of drawbacks. When utilization is too close to 80%, there’s no way for new borrowers to lever up, since doing so would immediately push utilization above 80% and result in them losing money from interest rates. Additionally, small withdrawals would be able to push utilization above 80%, resulting in large swings in interest rates. Ideally, borrowers should be able to (a) expect relatively consistent borrow rates and (b) have the ability to lever up.
The source of the issue is that the current interest rate mechanism is all or nothing; either borrowers pay no interest (making it heavily advantageous to borrow) or rates spike (making it extremely costly).
Specification
In order to reach a more stable equilibrium between lenders and borrowers, this proposal would implement the following:
- Giving 100% of collateral staking yield to the borrower
- Setting a borrow interest rate curve that starts at 0% APR (for 0% utilization) and linearly scales to 4% APR at optimal utilization
- Setting optimal utilization to 90% for WETH and USDC
- Optimal utilization for USDT and DAI would be unchanged. The interest rate curve above optimal utilization would also be unchanged for all assets.