ARC: Raise AMPL's max interest rate

Motivation: At the time of writing, AMPL has been in a liquidity crisis for about 2 weeks. Depositors cannot withdraw their AMPL, and no AMPL is available to borrow during the liquidity crunch. This points to a major failure in the lending market. Interest rates need to be raised for borrowers to be properly incentivized to return liquidity for some portion of the day. This means that daily borrow interest must exceed the gains obtained from rebasing.

Proposal: I am proposing to the AAVE governance community to drastically increase interest rates to incentivize borrowers to return liquidity to the protocol during periods of high rebase. Assuming that we want to protect liquidity during a positive rebase for 18 hours after a rebase, the proper max interest rate would be 20% per day, or 7300% APR. (Not going to express this in APY)

For more discussion on this topic, see here.

By the way, all my meager PP is locked in a smart contract wallet so I won’t be able to carry this proposal further unfortunately.

11 Likes

I think what we are seeing is an interesting experiment. Borrowers have high incentives to borrow in positive rebase territory (as we are seeing right now) and suppliers have higher incentive to dampen the exposure in negative rebase territory·
I think what is needed here is further tune the borrow rates and introduce some mechanism to balance borrow demand in negative rebase territory. I would love to hear the AMPL team opinion about it.

Side note, AMPL is currently very profitable for the aave protocol.

2 Likes

It looks like borrowers and lenders both have a high incentive to invest. They are both making profitable gains.

1 Like

This is intellectually dishonest since borrows and lenders have vastly different rights.

Borrowers can return their funds at any time.

Lenders cannot recall their lending.

This is functionally the opposite of any other borrow/lending market.

At the very least the AAVE team should put a disclaimer that says “If you lend into this pool, you may not be able to retrieve your assets for an indefinite period.”

5 Likes

1.018^(90)=5
If it lasts for 90 days, you will get five times the profit.
Be patient. When the market value of ampl is large enough, I believe the pool will drop.

The protocol is completely opensource and the different teams involved have interest in pushing things forward. The Aave team was not involved at all in the addition of AMPL as an asset, it was pushed forward by the Ampleforth team and community and the Aave holders accepted the proposal. So it should be the community, including interested parties from Ampleforth, to figure out the best solution.
I also don’t see how my answer is dishonest. I agree with @pakim249 that something needs to be done as currently the AMPL market is still unbalanced. I just think that disabling borrowing wouldn’t solve much as it doesn’t put any additional incentive for borrowers to repay their positions. A further adjustment of the IR curve (it might be the first time there is actually need for a reactive interest rate strategy implementation using a feedback loop, another idea for @brandon and team) and some strategy to incentivize borrowing in negative rebase territory in my opinion would do much better, without removing utility to one of the highest yield generating assets for the protocol.

2 Likes

I agree that it wouldn’t do much about the funds that are already borrowed so it would not be very effective on the current liquidity crunch. I am proposing this to prevent any more funds from being borrowed in the future. So basically, the goal of this proposal is to prevent any future liquidity crisis with AMPL and prevent the amount of assets locked by borrowers from increasing any further.

We can possibly raise interest rates to incentivize borrowers to return the liquidity faster. But liquidity will also be returned when the positive rebases stop, and I believe this will probably happen by the time we can pass a proposal anyway.

If the AMPL team is to implement solutions like a reactive or stronger IR curve, I think AAVE should keep the main market disabled until they can demonstrate thoroughly the proper functioning of their proposed solutions. It’s still my opinion that there is no reasonable interest rate that would protect liquidity at all times of the day, and more fundamental changes need to be implemented and tested before AMPL comes back to AAVE.

And to your point on the profitability of AMPL, I have two issues.

First, the aAMPL that the treasury collects will be skimmed a percentage of its market cap in the same manner as any other deposited AMPL, and the aAMPL balance will decrease in a negative rebase. This means that there is essentially a soft upper bound for how much aAMPL will be accrued in the treasury.

Secondly, AAVE is profiting from a completely broken lending market that prevents users that want to escape the lending pool from withdrawing their deposited funds for weeks. I really hope that the profit to AAVE is not a priority here. Maintaining AAVE’s reputation for being the most secure, reliable, and efficient lending protocol seems to me to be far more important than whatever short term gains AMPL can offer the treasury.

3 Likes

If there is a chance to raise the interest in order to incentivice the borrowers to return the ampl tokens I would be in favor of that.

Another solution to the problem could be to make the aave wallet able to recieve ampl rebasements.

1 Like

Ampl highly incentivizes borrowers and lenders and this exposed a unique scenario.

Technically, this can happen with any asset though. If a stablecoin was in high demand, and lenders were in high demand, we could see the same scenario play out with that stablecoin as well.

I don’t think this is broken. When a person lends, they need to be aware of the fact that 100% utilization can occur. - with any asset, not just Ampl.

Within crypto, so many people make rash decisions without thinking things all the way through. Every single thing you do in crypto has a risk associated with it.

I think what happened here is some lenders fomo’ed into the lending pool without thinking and now they want to change the rules. I knew ahead of time how this would play out, because I did my research and only put what I could afford to go without in the lending pool.

I do think that there should be some sort of disclaimer there to educate lenders on the risks of lending something in high demand, but unfortunately I doubt most read it anyway.

5 Likes

At this point this is a scam. People see the high % apy and ape into a slaughterhouse.

Just saying. No horse in the race

5 Likes

Sure, halting borrowing won’t incentivise further repayment from the borrowers. It does however, prevent the repayments from borrowers being instantly borrowed by other borrowers. Would give lenders some time to pull out. The IR curve being adjusted sounds good only issue being it will make AMPL have a significantly higher borrower APY than other "stable"coins even if 100% uitilisation periods are

1 Like

It’s not only the 100% utilisation rate. I (sad lender) understood that I would not be able to withdraw the AMPL and was okay with it. The issue is the AMPL caveats section in the docs not mentioning that aAMPL gets rebased proportionally to the available liquidity.
You are right in that 100% utilisation can happen to any asset. However, when the entire premise of an asset is uniform inflation and deflation, AAVE’s lack of clear communication regarding the absence of aAMPL rebasing during 100% utilisation is problematic.

1 Like

Again, Aave didn’t have anything to do with the Listing of the asset. The implementation and the proposal was pushed forward by the Ampleforth team and subsequent adjustments are also discussed here in the forum. Blaming Aave for this is just weird. I would recommend to reach out to the Ampleforth team or participate in the discussion here on the forum on how to improve this.

My only goal here is to prevent more people from falling into the trap. I’m new to AAVE so don’t know how to best approach this. Right now, the repayments into the pool get borrowed really fast and your chances of physically withdrawing are slim. Currently I’ve got a live liquidity feed set up using ether.js but some won’t be lucky enough to be able to do this so they’ll probably be locked in for good. Besides, it makes more sense for me to preach for the continuation of borrowing since I’ll be able hop on the borrowing side to make my money back >:).
All of that said, do let me know where the most effective place to talk about this would be. Thanks.

Hey Everyone

Wow this market has generated a lot of interest and opinions! More conversation is obviously better than less, and thanks for the care for the health of the Aave ecosystem. I think we’re all aligned with keeping Aave useful, valuable, and safe for all users.

First, I’d caution anyone from taking too extreme a position on a situation which is obviously short term. Adding lending to AMPL, which is a core value proposition of the protocol, should lead to higher utility for AMPL and the requisite supply adjustment in response. This is what we’re seeing now, but this growth can only be temporary. The price and sustained expansion has only been seen one other time in the protocol, when liquidity mining was put in place over a year ago. Liquidity, like lending, is a step function change in utility for a monetary asset. We will eventually see a return back to normal system states and utilization will naturally come down in line with that.

Some people have been claiming that depositors are losing out. Depositing and lending is taking an income position, as opposed to an equity position. At 100% utilization, AMPL is essentially a non-rebasing coin with extremely high APR and an associated lockup period. These are also not uncommon in finance, and not inherently a bad thing! There is a problem when users don’t know that’s what they’re entering into, though. There should be some affordance in the App UI that makes this clear, and this applies to all markets, not just the AMPL one.

So I, and many other happy users, wholeheartedly reject the idea that this market is broken. It has so far generated great value to depositors, borrowers, and the Aave protocol itself. This has been quantified in many different places. Despite AMPL’s small size, it is the second largest income-generating pool for the Aave protocol – ahead of USDT and DAI, and only a hair behind USDC.

Raising the maximum interest rate is always an option. For example, the max interest could be raised from 1.8% per day to ~2.5% per day. However, this has a downside of increasing the sensitivity around the interest rate elbow point. This unpredictability hurts borrowers and makes the market more unpredictable. Predictability in a market is safety, and a feature for both borrowers and depositors and should not be undervalued. For this reason, we don’t support further raising the interest curve.

Emilio’s idea of a dynamic interest rate strategy is an interesting one, and something we’ve considered in the past. Prolonged periods of max utilization would gradually shift the interest rate upward. This comes with risks, however, as feedback loops lead to very difficult-to-model systems with difficult configuration. While possible, it should be taken with care. By the time development is complete, we may find that it’s not needed anymore.

This doesn’t mean that all users are happy with their current situation, or that there are no more improvements we can make. Here are a few actions I propose that we can execute on right now:

  1. Add UI messaging that displays when the market is at high utilization. This solves the core problem of ensuring users know what actions they’re taking. This can be done easily and quickly, and actually applies to all markets not just AMPL.
  2. We will create and seed an aAMPL / AMPL pool on Mooniswap. This allows existing depositors who’d like to exit to do so, and it lets the market decide the value of doing so. I believe many will take the other side of that trade–especially those who are priced out by the ethereum gas fees of depositing.

The other angle here is that this problem goes away when AMPL spends more time in equilibrium. We have so far only seen one phase of the cycle with the current market configuration. Lending and shorting should also lead to more price stability once equilibrium is reached. For a longer term look at AMPL durability, see here.

There’s a reasonable argument that rebase adjustments should be more aggressive. Anyone who supports this is free to propose it on the AMPL message boards here. We made one adjustment here two years ago, to good results.

These are my humble opinions, shared by many others in the communities that I’ve talked to. The beauty of a decentralized model lies in the fact that it will ultimately be up to the communities to reach the consensus that best suits all. Different market types provide for different strategies and risk appetites–and diversity in options for users is ultimately a good thing for growing the space. Look forward to feedback and more thoughtful discussion on this important topic!

13 Likes

There needs to be some warning on liquidity when depositing $AMPL so retards like me don’t get honeypotted

or i have to wait 90 days while i watch $AMPL go back to 50 cents and i get totally rugged

Trapping lenders for 2 weeks with no warning is a terrible user experience and needs a fix. Period.

With the current implementation, this situation will happen every time AMPL goes over $1.26 and the interest maxes out. If I could, I’d build a bot to suck all that sweet liquidity every time that happens and trap those juicy lenders in my predictable dollar printing machine. Lenders will be trapped in position at 1.8% capped interest a day, while being inflated by +5% a day. They could still make money of course, but the simple fact is that the maths are not on their side and borrowers are being paid to leverage a predictable return due to the rebasing model, while having the freedom to exit anytime they please. As long as rebasing is predictably higher than the interest cap, this situation is unavoidable.

If it smells like broken, sometimes it simply is. No matter what fancy words y’all use.

So I, and many other happy users, wholeheartedly reject the idea that this market is broken. It has so far generated great value to depositors, borrowers, and the Aave protocol itself. This has been quantified in many different places.

I’d love to see a quantified calculation proving how depositors has benefitted over simply holding AMPL during this time, or frankly in any scenario where the price goes over $1.26 again. Include the negative opportunity cost of not being able to exit AMPL over that price, please.

At 100% utilization, AMPL is essentially a non-rebasing coin with extremely high APR and an associated lockup period. These are also not uncommon in finance, and not inherently a bad thing!

At 100% utilization AMPL is essentially a non-rebasing coin with extremely high APR, but a predictably higher inflation - meaning the depositor is losing equity value by design. Show me any other market that is operating successfully on that principle in periods of high demand for liquidity?

Until someone can convince me otherwise, I’ll believe that a bunch of AMPL folks managed to get this over the line on AAVE, and are now reaping the benefits of their well designed honeypot. Add lending to create a new extreme rebase cycle, and milk it from fools that get trapped.

One super profitable phase of the cycle… well played, well played.

4 Likes

In the long term, assuming that $AMPL positive rebase has 100 days in a year and aave is 100% borrowed, you will benefit 1.018 ^ 100=5.95 times. This is a steady investment

2 Likes

Missing one tiny detail. Your equity shrinks by 4% a day.