AAVE has an acute need for users who borrow assets. Borrowers are the ones that incur the interest that is paid to depositors (lenders) in AAVE pools. AMPL has strong borrowing demand and it appears the goal of this ARC is to make the depositor and borrower markets more efficient to better serve AAVE users. I support this ARC. I will now outline some of the factors that allowed me to reach this conclusion.
Borrowers drive the platform because many users are willing to lend any asset type. It is a bit more difficult to facilitate demand for borrowing across all asset types. Some assets have strong borrowing demand and some assets do not have strong borrowing demand. This is reflected in pool utilization rates. Some assets have extremely little activity from borrowers and these are typically volatile assets which are easy to identify when looking at the AAVE markets. Many lenders wish to earn interest on these assets but few have a compelling reason to borrow them and as a result APY’s are low and utilization rates are low. Assets with predictable debt obligations such as USDC, DAI and USDT are excellent for the AAVE platform because they generate healthy interest for AAVE users due to solid borrowing demand. These types of assets offer no upside or downside to borrowers but what they do offer to borrowers is a static and predictable debt obligation and that allows AAVE users to borrow those types of assets with confidence.
AMPL is a unique asset in that it offers AAVE users both the complexity of an asset that can offer upside potential while at the same time offering predictable debt obligation to borrowers. All assets that have a predictable debt obligation have grown to very large pool sizes. For example USDC is over 5.5 billion in market size and assets with predictable debt obligation have very healthy demand to borrow. Assets with predictable debt obligations grow large pool sizes and have healthy utilization rates which is ideal for AAVE and it’s users.
Since AMPL has strong borrowing demand the question becomes how do the parameters need to be adjusted? It is abundantly clear based on the consistent 100% utilization rate that borrow interest rates need to be increased dramatically. To what precise limit is very difficult to answer. While it seems that a limit higher than 10002 % APY could make some logical sense, I support the current ARC as described because the most important factor to preserve in any AAVE pool is the demand to borrow which is impacted by the interest borrowers will owe. The ARC as proposed should strike a better balance between APY for depositors and upside potential for borrowers but not cut too deeply into the upside potential of borrowers to harm that side of the market.
What will likely happen as a result of this ARC as proposed: An increase in APY for AMPL lenders will bring in more lenders as the higher APY will be compelling to a larger group of AAVE users. Borrower demand for AMPL will remain strong as AMPL has a predictable debt obligation yet upside for borrowers will dampen as the utilization rate approaches 100% and the 10002 APY limit.
I could see there being adjustments and refinements in these parameters in the future because it is difficult to perfect the limit at this time. It is clear that the ARC as proposed is moving in the direction which is correct, but towards a precision that is difficult to know. What will happen with this ARC is that the AMPL market will come into a better balance which will allow the pool to grow generating a better outcome for pool users.