Simple Summary
This proposal offers to update the USDT interest rate model by changing the Kink IR from 20% to 7% and the Max IR from 300% to 200%.
Implementation
Current interest rate model
Asset | Base IR % | Kink IR % | Max IR % | Kink % |
---|---|---|---|---|
USDT | 0.00 | 20.00 | 300.00 | 0.80 |
Proposed interest rate model
Asset | Base IR % | Kink IR % | Max IR % | Kink % |
---|---|---|---|---|
USDT | 0.00 | 7.00 | 200.00 | 0.80 |
Motivation and analysis
USDT currently uses the Major interest rate model with a 20% Kink IR and a 300% Max IR. The Major interest rate model is currently applied to assets such as ENS, RBN, PERP, and 1INCH. This model is not well suited to stablecoins due to its high kink interest rate of 20% and high maximum interest rate of 300%.
As a comparison, the USDC and DAI interest rate kinks are situated at 4%. USDT’s high Kink IR made it uneconomical for the market to reach high utilization. For example, the market’s utilization has remained between 27% and 40% for most of the last 30 days whereas USDC and DAI utilization ranged between 60% and 80%.
Lower utilization implies a larger spread between borrowers and lenders. This is because the interest borrowers pay is distributed across all lent assets. Lower utilization rates make markets less capital efficient for lenders.
Despite the lower utilization, borrowers have been borrowing USDT at rates varying between 6.5% and 9.5% for the last 30 days. This shows that there is a lot of market demand to borrow USDT at relatively high-interest rates.
Assuming borrowers will continue to borrow at similar rates, the utilization of the pool would increase from 27-40% to approximately 80% by lowering the Kink IR from 20% to 7%.
Assuming a 7% borrow rate, this means that lenders will now earn 7% x 80% x 0.95 = 5.3% compared to 1.9% at 28% utilization given the current interest rate model. This represents a 2.8x increase in supply rates for lenders. Such an increase in capital efficiency is expected to drive additional capital inflows and more borrowing activity leading to more fees for the DAO. This change would also make Euler’s USDT market more competitive.
Lowering the Max IR from 300% to 200% will also contribute to making borrowing rates less volatile. The proposed Max IR of 200% for USDT is higher than USDC and DAI Max IRs thereby mitigating the market’s liquidity risk in case of high utilization.
The objective of this proposal is to increase the capital efficiency of the USDT market while mitigating the market’s liquidity risks.
Conclusion
Updating the USDT interest rate model will lead to higher market utilization and tighter spreads between borrowing and lending rates. This proposal would benefit the DAO and its users by making the protocol more capital efficient.
Voting
Options are:
- YES - implement the changes above
- NO - do not implement the changes above
Snapshot
Link to voting here: Snapshot