Since then, there has been a near 100% utilization rate of lent assets. This suggests the maximum cap of the interest rate curve is not able to reach a high enough value to effectively balance incentives between the borrow side and lending side of the marketplace.
While the AMPL spot market is currently in a relatively extreme condition, the Aave borrowing market should be able to perform efficiently in all market scenarios.
We suggest the following new variable interest rate model:
- Optimal utilization = 75%
- Slope1 = 2%
- Slope2 = 10,000%
This leads to a piecewise linear curve with two parts and three defining points:
- Borrow Interest(0) = 0% APY
- Borrow Interest(75) = 2% APY
- Borrow Interest(100) = 10002 % APY
Since this will result in overall higher fees coming into the system, in tandem we also suggest lowering the reserve factor from 20% to 10% to share more of the revenue with suppliers. This would be submitted as a separate AIP to decouple these decisions.
We believe a nonlinear interest curve is healthiest long-term and could likely be used by many other assets as well, however this work can be discussed more in the future.