eIP 53 Set FRAX IRM to Stablecoin and Reduce Reserve Fee

[eIP] Euler Improvement Proposals Voted Proposals
1

2023-01-30T05:00:00Z→2023-02-05T05:00:00Z

Title: [RFC] Set FRAX IRM to Stablecoin and Reduce Reserve Fee
Author(s): Warden Finance
Submission Date: 01.30.2023

Simple Summary

In order to improve Frax market adoption, we are proposing to:

  • Change Frax IRM to match those of other stablecoin markets on Euler
  • Reduce reserve factor from 0.23 to 0.1

Abstract

Stablecoin markets on Euler represent 47%, or $88M of the total borrow activity on Euler.

Due to its interest rate model, Frax utilization is currently very low compared to other stablecoin markets on Euler.

Frax is currently sitting at 8.3% utilization rate ($166k total borrowed) vs its peers:

  • USDC: 63% utilization ($47M total borrowed)
  • USDT: 57% utilization ($34M total borrowed)
  • DAI: 43% utilization ($2.96M total borrowed)
  • LUSD: 80% utilization ($2.91M total borrowed)

For comparison, here’s the overview of Frax on Aave v2:

  • 63% utilization rate ($7.1M total borrowed)
  • Similar IRM to other stablecoins on Euler
  • Reserve fee of 20%

Motivation

Changing FRAX IRM to match other stablecoins is a clear opportunity to unlock untapped borrowing activity on Euler with no downside risk.

Risk profile

Frax on-chain liquidity is very high and its volatility is in line with other stablecoins. Therefore, a stablecoin IRM is well suited.

On-chain KPIs (as provided by Warden Finance platform)

  • Near zero slippage for trades up to 10M
  • ~$1.7B DEX liquidity distributed over >90 pools
  • All-time max drawback over 1h of -3.68%
  • Daily volatility of 0.73% over 24h

image
image1018×1197 142 KB

Outcome

Given a scenario where borrow APY stays about the same (2%), and lending activity stays the same, here is the impact on Frax market:

  • Utilization would rise towards its peers at around 40%
  • Supply APY: 0.12% → 0.72% APY (50 bps increase)
  • Total Borrows: 166k → 800k (481% increase)
  • Yearly Reserve Fees: $763/year → 1.6k/year (210% increase)

Specification

  • Update FRAX IRM to match USDC and DAI markets.
    • Current: IRM Major (Base=0% APY, Kink(80%)=20% APY Max=300% APY)
    • Proposed: IRM Stable (Base=0% APY, Kink(80%)=4% APY Max=100% APY)
  • Decrease FRAX Reserve Factor from 0.23 to 0.10
  • Yes - In favor of this proposal
  • No - Against this proposal

0 voters

7 Likes
2

Temperature check poll is up. Let us know if you are in favor or not of this proposal.

3

in support altho im a bit worry on the potential depeg of frax since they are probably spreading to thin on the product side and creates potentially a lot of unknown risk

4

Thanks for the comment @patria. This proposal only updates FRAX’s interest rate model and does not change its collateral status. FRAX would remain an isolated asset such that a FRAX depeg would not directly affect the Euler protocol.

5

ah ok, my bad not realizing this. in supprt also then

1 Like
6

Title: eIP 53 Set FRAX IRM to Stablecoin and Reduce Reserve Fee
Author(s): Warden Finance
Submission Date: 02.17.2023

Simple Summary

In order to improve Frax market adoption, we are proposing to:

  • Change Frax IRM to match those of other stablecoin markets on Euler
  • Reduce reserve factor from 0.23 to 0.1

Abstract

Stablecoin markets on Euler represent 47%, or $88M of the total borrow activity on Euler.

Due to its interest rate model, Frax utilization is currently very low compared to other stablecoin markets on Euler.

Frax is currently sitting at 8.3% utilization rate ($166k total borrowed) vs its peers:

  • USDC: 63% utilization ($47M total borrowed)
  • USDT: 57% utilization ($34M total borrowed)
  • DAI: 43% utilization ($2.96M total borrowed)
  • LUSD: 80% utilization ($2.91M total borrowed)

For comparison, here’s the overview of Frax on Aave v2:

  • 63% utilization rate ($7.1M total borrowed)
  • Similar IRM to other stablecoins on Euler
  • Reserve fee of 20%

Motivation

Changing FRAX IRM to match other stablecoins is a clear opportunity to unlock untapped borrowing activity on Euler with no downside risk.

Risk profile

Frax on-chain liquidity is very high and its volatility is in line with other stablecoins. Therefore, a stablecoin IRM is well suited.

On-chain KPIs (as provided by Warden Finance platform)

  • Near zero slippage for trades up to 10M
  • ~$1.7B DEX liquidity distributed over >90 pools
  • All-time max drawback over 1h of -3.68%
  • Daily volatility of 0.73% over 24h

image
image1018×1197 142 KB

Outcome

Given a scenario where borrow APY stays about the same (2%), and lending activity stays the same, here is the impact on Frax market:

  • Utilization would rise towards its peers at around 40%
  • Supply APY: 0.12% → 0.72% APY (50 bps increase)
  • Total Borrows: 166k → 800k (481% increase)
  • Yearly Reserve Fees: $763/year → 1.6k/year (210% increase)

Specification

  • Update FRAX IRM to match USDC and DAI markets.
    • Current: IRM Major (Base=0% APY, Kink(80%)=20% APY Max=300% APY)
    • Proposed: IRM Stable (Base=0% APY, Kink(80%)=4% APY Max=100% APY)
  • Decrease FRAX Reserve Factor from 0.23 to 0.10
7

Thank you for working on this proposal @Shippooor. We can see the obvious benefit this brings. We do though have a small concern in treating IRM and RF for Frax at similar levels to fully collateralized stables like USDC, USDT, LUSD, DAI, etc. This would signal the risk of each of these stables are the same and can lead to complacency.

Current RF for the above markets as below:
USDC: 0.23
USDT: 0.05
LUSD: 0.15
DAI: 0.23

We think FRAX RF should be either maintained at 0.23 or lowered to 0.15.

Also looking at the RF for the stables above, we consider the right approach would be to conduct a thorough review of RF (and other parameters) for all stables and propose changes to all of them as part of one comprehensive review of stables on Euler that is then put to vote.

This would help compare risk, liquidity, mechanics, utilization, etc for the full offering of stables as each offer their own design representing different risk profiles. For example, LUSD might have lower onchain liquidity then FRAX or DAI, but is fully redeemable at anytime, and hence has lower depeg risk then the other two.

Again, this is not to take away anything from the work by Warden on this proposal and we are thankful for the insight and the initiative shown here.

8

Snapshot vote: Snapshot

9

Hey @shaishav0x I think you have a valid point that we should re-evaluate the reserve factors for all currencies on Euler such that they are all in line. The main objective of this proposal is to increase utilization for FRAX by making the IRM more appropriate. A lower RF for FRAX won’t make a meaningful difference given it’s not heavily utilized for now. It will only mean the protocol will generate less fees from the FRAX market. I agree with you that a review of RF for all currencies is needed and will post a proposal in the coming weeks to do that. Thanks for your input.