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AIP-10: Further optimizing the borrowing interest rate slope

Background

​AIP-5 aimed to improve the utilization of the lending vaults by adjusting the slope2 interest rate as well as the kink (utilization at which Slope2 begins.) In discussion with our research team, we believe there is a way to further optimize the interest slope model that will benefit lenders and borrowers
In a nutshell, we will:
  • Lower Slope2 interest rate to approx. the current borrowing rate
  • Lower the kink for slope2 to approx. the current utilization rate

Rationale

  • Given the current yields on DEXs, we are unlikely to get more borrowing demand on the current interest model as it will put marginal yields for LYF in the negative territory. This means the utilization rate will likely hover in this range (which it has been over the recent months.)
  • By lowering the interest rate and the kink as proposed, we will create a large region where the borrowing rate is constant and profitable, making LYF more attractive to farmers as the cost of borrowing becomes predictable.
  • The adjustment will also make AVs more profitable and greatly simplify the future adjustment required when we add new capacity to the AVs, which we hope to do after the repurchasing full rollout.
  • Lenders will still receive higher yields from higher utilization (see attached Google sheet below)
  • There will be no impact to current yield and protocol revenue. We are not making any changes to the interest model at lower utilization, so this change will have no negative impact to the protocol and lenders. The changes only impact incremental borrowing demand.
  • We still keep the slope3 interest rate unchanged. This means once utilization gets beyond 90%, the rate will increase rapidly to make sure there will be enough liquidity for withdrawal.

Implementation

We propose the following target interest models for each asset:
Slope2 Kink: utilization at which Slope2 begins
Slope2 Interest: the borrowing interest rate for Slope2 (the flat part)
Token
Slope2 kink utilization
Slope2 Interest
BNB
50%
10%
BUSD
30%
8%
USDT
40%
8%
See attached sheet for reference: Interest Model Adjustment - Google Sheets​
– *We will apply the the changes to the BNB, BUSD, USDT first since they are the largest vaults. Similar approach can also be taken for the remaining asset pools

Voting

This proposal will be a simple YES or NO vote.
YES would start implementing the proposed interest model above while NO would keep the interest model as is.

Resolution:

  • Community votes to adjust the interest rate.

References: