- Title: Amend Borrow Factors and Interest Rate Models
- Author(s): Seraphim Czecker
- Submission Date: 10.03.2022
Simple Summary
Proposal includes a batch of changes to the MATIC, CVX, 1INCH, SHIB, AGEUR, oSQTH, ENS, RBN, USDT, PERP, AXS assets on Euler. These include increasing borrow factors, changing the interest rate models and upgrading assets to cross tier.
Abstract
This is a proposal to increase the borrow factors on MATIC, CVX, 1INCH, SHIB, AGEUR, oSQTH, ENS, RBN, PERP, AXS on Euler, enabling Euler users to borrow more of these assets against eligible collateral. These assets fit the criteria necessary for higher capital efficiency. They’re backed by robust oracles on Uniswap v3. They’re significantly distributed and decentralised. They have relatively high liquidity on numerous decentralised exchanges. Smart contract risk is relatively low. The proposal also includes a change to its interest rate model. These changes would bring the interest rates in line with competing protocols. On the upside, this would increase capital efficiency and provide more utility for users. On the downside, improving the borrow factors makes attacking the lending pools easier, albeit not systemic. In this particular case, the benefits outweigh the potential risks. Additionally, this proposal includes making MATIC, CVX, SHIB, AGEUR, oSQTH, ENS, RBN, USDT, PERP, AXS cross tier assets.
Motivation
The goal of the proposal is to boost the capital efficiency and utility of the Euler protocol. The current risk factors on the protocol are purposefully restrictive as a part of Euler’s soft-launch in late Dec 2021. Since then, the protocol has performed well against a backdrop of extreme price volatility and a large number of liquidations across DeFi. Furthermore, there have been no reports of any critical bugs on the protocol in spite of a $1m public bug bounty being live for nearly a month. Improving the borrow factors and the interest rate models on the mentioned assets is one of the first steps in ramping up capital efficiency in a risk-managed fashion on Euler.
Specification
1. What is the link between the eIP author and the asset(s)?
None. The proposer is the head of risk at Euler Finance and has no link to the assets.
2. Provide a brief description of the asset(s) and the underlying protocols.
- MATIC is the gas, governance and network security token of the Polygon network.
- CVX can be staked on Convex Finance to earn a share of Curve LP’s CRV earnings. Curve is a popular AMM.
- 1inch token is the governance token for the 1inch ecosystem. 1inch is a popular DEX aggregator.
- SHIB is a popular meme token.
- agEUR is a stablecoin of the Angle Protocol whose value is pegged to the Euro.
- oSQTH is the tokenised perpetual option on ETH developed by the Opyn team.
- ENS holders govern the Ethereum Name Service, a protocol for human-readable crypto addresses and decentralized domain names.
- RBN is the governance token of Ribbon Finance. Ribbon is a structured product protocol.
- USDT is a popular stablecoin.
- PERP is the governance token of Perpetual Protocol. Perpetual protocol is an AMM for perpetual derivative contracts.
- AXS is the governance token of the popular Axie Infinity Blockchain-based game.
3. Explain why the eIP would benefit Euler’s ecosystem?
The proposed changes apply to established assets in DeFi and would unleash more capital efficiency as users will be able to borrow more against their collateral.
Borrowing oSQTH in particular would be closer to shorting it on Opyn in terms of capital efficiency.
4. Where do the assets trade?
All of these assets trade on major DeFi AMMs and most on CeFi exchanges as well. Consequently, it would allow liquidators to relatively easily buy these assets to repay debt in the event of liquidations.
5. What are the volumes and market capitalisations?
All assets have substantial volumes on various exchanges and market caps.
6. What is the liquidity like in the Uniswap V3 liquidity pool versus ETH?
XYZ/WETH Uniswap V3 pools have sufficient TVL and are spread across the entire price range.
7. What security/auditing reports have been done?
All the projects have undergone auditing by reputable firms and/or stood the test of time.
Proposed Interest Rate Change:
| Asset | Base IR | Kink IR | Max IR | Kink% | |||
|---|---|---|---|---|---|---|---|
| MATIC | 0% | 20% | 300% | 80% | |||
| CVX | 0% | 20% | 300% | 80% | |||
| 1INCH | 0% | 20% | 300% | 80% | |||
| SHIB | 0% | 20% | 300% | 80% | |||
| AGEUR | 0% | 4% | 100% | 80% | |||
| OSQTH | 0% | 20% | 300% | 80% | |||
| ENS | 0% | 20% | 300% | 80% | |||
| RBN | 0% | 20% | 300% | 80% | |||
| PERP | 0% | 20% | 300% | 80% | |||
| AXS | 0% | 20% | 300% | 80% |
Current Interest Rate Model:
| Asset | Base IR | Kink IR | Max IR | Kink% |
|---|---|---|---|---|
| Default | 0% | 10% | 300% | 50% |
Proposed Borrow Factor Change:
| Asset | Proposed Borrow Factor |
|---|---|
| MATIC | 0.66 |
| CVX | 0.50 |
| 1INCH | 0.50 |
| SHIB | 0.50 |
| AGEUR | 0.50 |
| OSQTH | 0.56 |
| ENS | 0.66 |
| RBN | 0.50 |
| PERP | 0.50 |
| AXS | 0.66 |
Current Borrow Factors:
| Asset | Current Borrow Factor |
|---|---|
| MATIC | 0.28 |
| CVX | 0.28 |
| 1INCH | 0.28 |
| SHIB | 0.28 |
| AGEUR | 0.28 |
| OSQTH | 0.28 |
| ENS | 0.28 |
| RBN | 0.28 |
| PERP | 0.28 |
| AXS | 0.28 |
Base IR is the APY at 0% utilisation; Kink IR is the APY at Kink%, Max IR is the APY at 100% utilisation, Kink% is the utilisation level where the slope becomes steeper
Implementation
| Contract | Method | Token | Token Name | Token Address | Updates |
|---|---|---|---|---|---|
| governance | setAssetConfig | MATIC | Polygon | 0x7d1afa7b718fb893db30a3abc0cfc608aacfebb0 | borrowIsolated:false, borrowFactor:0.66 |
| governance | setIRM | MATIC | Polygon | 0x7d1afa7b718fb893db30a3abc0cfc608aacfebb0 | IRM:MAJOR |
| governance | setAssetConfig | CVX | Convex Finance | 0x4e3fbd56cd56c3e72c1403e103b45db9da5b9d2b | borrowIsolated:false, borrowFactor:0.5 |
| governance | setIRM | CVX | Convex Finance | 0x4e3fbd56cd56c3e72c1403e103b45db9da5b9d2b | IRM:MAJOR |
| governance | setAssetConfig | SHIB | Shiba Inu | 0x95ad61b0a150d79219dcf64e1e6cc01f0b64c4ce | borrowIsolated:false, borrowFactor:0.5 |
| governance | setIRM | SHIB | Shiba Inu | 0x95ad61b0a150d79219dcf64e1e6cc01f0b64c4ce | IRM:MAJOR |
| governance | setAssetConfig | AGEUR | agEUR | 0x1a7e4e63778b4f12a199c062f3efdd288afcbce8 | borrowIsolated:false, borrowFactor:0.5 |
| governance | setIRM | AGEUR | agEUR | 0x1a7e4e63778b4f12a199c062f3efdd288afcbce8 | IRM:STABLE |
| governance | setAssetConfig | oSQTH | Opyn Squeeth | 0xf1b99e3e573a1a9c5e6b2ce818b617f0e664e86b | borrowIsolated:false, borrowFactor:0.56 |
| governance | setIRM | oSQTH | Opyn Squeeth | 0xf1b99e3e573a1a9c5e6b2ce818b617f0e664e86b | IRM:MAJOR |
| governance | setAssetConfig | ENS | Ethereum Name Servi | 0xc18360217d8f7ab5e7c516566761ea12ce7f9d72 | borrowIsolated:false, borrowFactor:0.66 |
| governance | setIRM | ENS | Ethereum Name Servi | 0xc18360217d8f7ab5e7c516566761ea12ce7f9d72 | IRM:MAJOR |
| governance | setAssetConfig | RBN | Ribbon Finance | 0x6123b0049f904d730db3c36a31167d9d4121fa6b | borrowIsolated:false, borrowFactor:0.5 |
| governance | setIRM | RBN | Ribbon Finance | 0x6123b0049f904d730db3c36a31167d9d4121fa6b | IRM:MAJOR |
| governance | setAssetConfig | USDT | Tether | 0xdac17f958d2ee523a2206206994597c13d831ec7 | borrowIsolated:false |
| governance | setIRM | USDT | Tether | 0xdac17f958d2ee523a2206206994597c13d831ec7 | IRM:MAJOR |
| governance | setAssetConfig | PERP | Perpetual Protocol | 0xbc396689893d065f41bc2c6ecbee5e0085233447 | borrowIsolated:false, borrowFactor:0.5 |
| governance | setIRM | PERP | Perpetual Protocol | 0xbc396689893d065f41bc2c6ecbee5e0085233447 | IRM:MAJOR |
| governance | setAssetConfig | AXS | Axie Infinity | 0xbb0e17ef65f82ab018d8edd776e8dd940327b28b | borrowIsolated:false, borrowFactor:0.66 |
| governance | setIRM | AXS | Axie Infinity | 0xbb0e17ef65f82ab018d8edd776e8dd940327b28b | IRM:MAJOR |
| governance | setAssetConfig | 1INCH | 1inch | 0x111111111117dc0aa78b770fa6a738034120c302 | borrowFactor:0.5 |
| governance | setIRM | 1INCH | 1inch | 0x111111111117dc0aa78b770fa6a738034120c302 | IRM:MAJOR |
Risk Assessment
Oracle Grading
According to our inhouse research, meaningful attacks on the XYZ/WETH Uniswap V3 oracles appear unfeasible. The substantial TVL spread across the entire price range is able to prevent both artificially elevated and depressed oracle prices.
We therefore give MATIC, CVX, 1INCH, SHIB, AGEUR, oSQTH, ENS, RBN, USDT, PERP, AXS a strong oracle rating.
For more details, check out the full report.
Decentralisation
While not all assets score high on decentralisation, it’s sufficient enough to support capital efficiency improvements proposed in this eIP.
Volatility
All assets exhibit manageable realised volatility versus WETH.
Liquidity
The assets are listed on multiple exchanges (both CeFi and DeFi) with decent volumes occurring on both, apart from oSQTH and agEUR which mostly trade on DeFi AMMs. Given the depth of liquidity pools and order books, it is unlikely that liquidating users in an adverse scenario will be challenging given Euler’s Dutch auction mechanism on liquidation bonuses.
Smart Contract Risk
All the projects have undergone auditing by reputable firms and/or stood the test of time.
Interest Rate changes
| Asset | Base IR | Kink IR | Max IR | Kink% | Current Utilisation | Current Borrow APY | New Borrow APY |
|---|---|---|---|---|---|---|---|
| MATIC | 0% | 20% | 300% | 80% | 0.00% | 0.00% | 0.00% |
| CVX | 0% | 20% | 300% | 80% | 0.01% | 0.00% | 0.00% |
| 1INCH | 0% | 20% | 300% | 80% | 0.19% | 0.04% | 0.05% |
| SHIB | 0% | 20% | 300% | 80% | 0.00% | 0.00% | 0.00% |
| AGEUR | 0% | 4% | 100% | 80% | 0.00% | 0.00% | 0.00% |
| OSQTH | 0% | 20% | 300% | 80% | 2.21% | 0.44% | 0.55% |
| ENS | 0% | 20% | 300% | 80% | 0.41% | 0.08% | 0.10% |
| RBN | 0% | 20% | 300% | 80% | 0.00% | 0.00% | 0.00% |
| PERP | 0% | 20% | 300% | 80% | 0.00% | 0.00% | 0.00% |
| AXS | 0% | 20% | 300% | 80% | 0.00% | 0.00% | 0.00% |
The proposed rate changes won’t significantly affect the current interest rates.
Conclusion
Since this eIP is primarily about increasing borrow factors and promoting assets to cross tier as opposed to promoting assets to collateral status, it bears less systemic risk. While these changes create more systemic risks, they are balanced given the high quality nature of the assets and the nature of the eIP.
After careful consideration, we recommend approving this eIP.
Relevant Links
Oracle grading tool: https://oracle.euler.finance/