eIP 53 Set FRAX IRM to Stablecoin and Reduce Reserve Fee

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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

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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