I agree! Something must change and the interest rate should somehow compensate the rebase rate otherwise I don’t see how this should work in the long run.
I think 10,000% APY is still low, that’s not even 1.3% a day. If you see the data from rebases, most positive rebases are way higher than that. Every time AMPL has positive rebase above 1.3% there will be 100% borrow in AMPL pool. Maybe 100,000% APY (around 1.9% per day) or even 1,000,000% APY (around 2.6% per day) should be better for experimentation now, otherwise AMPL is still going to have 100% borrowed when positive rebases happen.
In the medium/long term I would like to see different slopes, depending if AMPL is in a positive, neutral or negative rebase.
Interesting comments here. I’ve studied this a bit and it seems like the arbitrage opportunity described by @pakim249 makes it so the interest rate for AMPL will always be naturally super high in the current implementation. Is there a way to counter this long term @brandon ?
On the short term I would support increasing the max interest rate to a very high amount like @Alex_BertoG said to make it fairer for the depositors.
But long-term we need organic borrowers and no one will borrow organically if the rate is at such a high rate. What do we do here?
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.
@pakim249 The arbitrage you describe is not a bug, it’s a feature.
Since the loaned amount does not rebase, lenders transfer their exposure to supply-side risk on to the borrower, this is what allows ampl to safely denominate debt.
To reach an equilibrium, the cost of borrowing ampl during positive rebase needs to be the same as the rebase, arbitrage traders will continue to borrow ampl until this is the case. As it stands, the apy cap prevents market from reaching this equilibrium, which is why the utilization rate is 100% currently.
While I support this proposal, i’m inclined to agree with @DFC, I think apy cap should eventually be far higher, as if ampl were to see a sudden increase in demand, it could easily reach 100% utilization again even with 10,000% apy.
I think this ARC should be implented to AIP as soon as possible to protect the stake of lenders, no need to discuss futher details, as least the current ARC can work.
Agreed, the current situation is making it difficult for lenders (cannot remove their ampl because of constant 100% usage rate) and also doubly because the incentive to put any more ampl into the pool is low because of the capped APY
I support the proposed ARC. It’s a good starting point and better than what we have now even if it does not end up being the final solution.
I support this ARC. Others point out that 10,000% still doesnt cover larger rebases and I agree, and I think ampl might need custom fee structures that are elastic and scale up and down in the future but this looks like it can really showcase what is possible and also bring great benefits and borrowing volume for Aave.
Would like to raise one point - you state that currently the reserve factor is 20% (hence 38% to lenders but 48% fee to borrow), and aim to lower it to only 10% - however at 10,000% this is 1000% going out to the reserve - is this way too much , does this take away too much value away from the lender? Because as pointed out the 10,000% only scales to cover rebase to around 2.5% (but possibly even less with 10% taken out? Because the apy is so massive couldnt/shouldnt the reserve just be 1% , or 0.5% or less even? Or again this makes me think that ampl might need custom and elastic fees in the future.
Also would like to add a +1 to seeing this go to vote as soon as possible as the issue of the current lenders only earning 1/100th of the rate of ampl holders during the 2 larger rebase days, and the fact that they are locked in because the utilization is at 100% so cant withdraw (which is a bigger issue).
But amazing to see in this first trial and outstanding to see 100% demand. Congrats to both aave and ampl teams, this is pretty historic.
I’d like to point out that using APY in this discussion is extremely misleading. 10000% APY is about 465% APR. If 10% of this were to go to reserve, this would be about 46.5% APR or about 51% APY, which is pretty far from 1000%.
Also, raising the interest rate cap is not sufficient justification to lower reserve factor in my opinion, as it remains to be seen whether this cap is actually realized. Also, the ecosystem reserve collects aAMPL, not AMPL. This means that the ecosystem reserve would be subject to the same arbitrage that lenders are subject to and have the same liquidity problems.
Also , just now noticing that the fee is severely S curved / “all or nothing” , ie. we have 80% utilisation but the fee is around 2% . Yet at 100% it is 38%. This will also be even more extreme with the new 10,000% fee structure? Is it not possible to have the fee weighted more evenly so it is not an all or nothing scenario which could make it an extreme of being worth it to deposit ampl or not only at/near 100% utilisation?
I agree the S curve is super aggressive but given the parameters in AAVE, it is a vast improvement over the current default. Below is the piecewise curve in plot form:
It is worth noting, starting from the first rebase on 7/25 till present (assuming 100% utilization), a AMPL holder would have gained around 17% in rebase gains while a person who lent in AAVE received only 0.429% in interest.
Under this new proposal with the same assumptions, the lender would receive around 5.09% almost 12x more so I think its a clear step in the right direction.
@brandon are you guys going to make a snapshot before making an on-chain proposal?
It seems like @DFC and @pakim249 and others have a reasonable concern that a 10,000 APY rate would be too low, and it’s possible we would hit the max rate again. This needs to be avoided as people being stuck and it not being possible for them to withdraw would be a bad outcome. I believe it is better to have a max rate that is higher than necessary than one that is too low. In my opinion we should target for a very high rate (2-3% daily APR for example) that means we will not encounter issues again. Thanks.
As an AMPL holder and trader, I would like to add my voice to those saying 10000% APY is too low.
With the current peg (1.04$), we can expect liquidity to be fully borrowed as soon as the AMPL average daily price hits 1.17$.
I believe AMPL can be considered in normal market condition in a range of 25 cents under or over peg (0.79$ to 1.29$). This is where the price action is 99% of the time. The Aave interest curve should adapt to cover these normal market conditions - and borrowers should not be able to arbitrage the rebase so easily within that range.
Also, offering an higher APY will allow withdrawal of some liquidity if AMPL hits a high price (let’s say 1.25$) and the lender believes that AMPL is about to enter an exceptional expansion period. So more flexibility to lenders who would prefer to lend only when AMPL is in neutral zone.
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But long-term we need organic borrowers and no one will borrow organically if the rate is at such a high rate. What do we do here?
Stable apr seems like it’d be a solution to this, protects borrowers from the chance of paying an astronomical apr if ampl is in positive rebase.
When rebase is negative, we can expect the lending dynamic to reverse. Ampl holders will deposit massive amounts of Ampl to Aave in order to reduce their exposure to the rebase. This, combined with the loss of significant borrow demand will lead to extremely low APRs when ampl is contracting.
Ampl’s apy will be extremely high when price is above target, and extremely low when price is below target. A stable rate could average these extremes out, so lenders, and borrowers get a more consistent rate.
When the AMPL enters into positive rebase, the inflation rate could reach more than 5% per day. It is 5%*365=1825% APR. If converted into daily compound APY, it will reach 5421184057.78%. So why would I deposit my AMPL into aave to earn the interest when we are in positive rebase? Unless you raise the maximum interest rate to 5421184057.78%.
Do you know the reason there was no stable option APR when it first launched? I agree the stable rate is also an interesting way of tackling this problem as AAVE stablerate adjusts upwards based on a few conditions which would be met for positive rebases.
The interest rate model is the liquidity management tool of the Protocol
The variable rate model evolves constantly as a result of utilisation, leading to a high cost of borrowing when liquidity is rare
On the other hand, the stable rate stays stable from inception, it shifts liquidity risk from the borrower to the Aave Protocol with rebalance only possible in extreme circumstances. Which require a depositor yield below 25%, a condition which has not been met yet meaning rebalances would have not been possible. Stable borrowers would therefore have no incentive to pay back their liquidity which is earning much more than it costs
Stable rate keeps most liquidity risk in the Protocol affecting depositors instead of transferring it to borrowers. This makes it un-ideal for assets that are subject to liquidity stresses which are more likely when liquidity is low
I hold ampl and would love to lend on aave but the current Apy doesn’t make sense for anyone to lend out ampl during positive rebase. I hope this proposal can pass so I can lend ampl on aave and reduce my holding exposure