ARC: Raise AMPL's max interest rate

Raising interest is sound policy for an “asset” that seeks to become “Stable” Ampl deserves expansion, Lenders should once again not suffer the brunt of it(Thinking of IL for the early geysers, very similar situation here), keep the daily generated interest ceiling 2-1.5% lower then the positive re-base %. That way borrowers can still ARB at a reasonable rate in expansion cycles and lenders can ride expansion cycles north of 1.8% daily.

Dictate a clause for expansion cycles being multiple days of High 95% or more utilization and positive re-bases before that change ticks on.

Simple truth of finance is at work here, The Lending asset needs to operate Identically to the borrowed asset, anything else is ponzi

Which of course only makes sense for assets that behave like other assets (i.e. non-rebasing assets), which AMPL is not, and thus, this “truth” cannot be applied to it.

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What would that change if there was a higher interest rate? this situation cannot be solved with the maximum interest rate. Big picture is It works with the amount of total circulation supply and the market pricing this supply. We need to think about this in terms of both lenders and borrowers. because later maybe we as borrowers will want less max interest rate according to total supply and price conditon. At the moment everything is going well according to the financial rules.

Going well for Borrowers/Holders of AMPL, aAMPL lenders are being diluted heavily

So Fiat is unaffected by Inflation/Deflation? We can’t use Fiat to lend?

What was AMPL trying to be again?

Of course. More fees get negative result for borrowers when rebase go down. They back AMPL And lenders can access to his liquidity. If APY not go up this pool is broken.

Ampl lending isn’t supposed to allow the lender to keep full exposure to volatility. It’s impossible to have stable debt denomination while keeping full exposure to volatility for the lender.

Rebasing assets act in a fundamentally different way than fixed supply assets. We shouldn’t be trying to make rebasing assets lend like fixed supply assets, that’s like trying to cram a square peg into a round hole.

Lenders need to know that lending ampl has different risks than lending fixed supply tokens.

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Are aAMPL holders protected from negative rebase %? Honest question, The AAVE AMPL caveat page does not seem to indicate that Lenders are exempt from negative rebase cycles. If aAMPL acts as a hedge during negative rebase that could be interesting.

Rebases are not magic, Inflation and Deflation exists, Renumeration of Fiat exists. There IS something called a money supply even if the FRED no longer reports on it.

What Incentive is there to lend AMPL on AAVE past a 1.26 per token? Lenders do need to be aware of Trapped Liquidity, the inability to swap/withdraw while utilization is near 100%

They are excluded from the rebase, positive and negative, in accordance with the utilisation of the lending pool. If the pool is at 75% utilisation, the lenders experience 25% of the rebase. It’s easiest to think about this in terms of where the AMPL is at any given time - whoever’s holding it, gets the rebase on it.

People are often quick to assume that utilisation would be 0% during negative rebase but we have historically seen that to not be the case.

Lending is primarily a long term hands off strategy. If you were actively managing your position it would be more effective to exit a lending position during times of massive growth, but if you’re taking a more passive approach then lending continues through the ups and the downs and it’s the overall result that’s important.

Absolutely agree that awareness should be emphasised, both of the nature of how lending AMPL works, and also of the Mooniswap pool which allows lenders to exit their position even when utilisation is at 100% (https://mooniswap.info/pair/0xce4cf5dca6aee3b48b28a846b6253533e6790129)

As a long-time hodler of AMPL and geyser participant, I certainly wouldn’t mind if a potential aAMPL/AMPL geyser pool even gave a bit of a premium over other geysers. Incentivizing lending through the geyser heavier than other geysers will serve to increase the overall size of the AMPL reserve, bring more attention to the pool and project by better balancing the utilization during expansions. The pool pair also potentially adds another layer of utility even, and gives lenders a “special benefit” to offset the “special cost” of lending.

We might even make such a geyser reward participants by the length of time (in hours or something) they have lent consecutively such that there’s a ramp in reward; if you’ve been “stuck” lending in a big expansion cycle for 2 weeks, it might be reasonable that they get a better geyser rate than one who just entered.

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Thank you for educating me on pool utilization and its relation to interest regardless of the rebase :smiley:, I was not aware of that. I don’t think we will see negative rebase and 100% utilization anytime soon since that seems inversely correlated, outside of massive liquidity for big short positions.

I do still believe more incentives are needed for lenders during a long expansion phase, which I think we are seeing the beginning of.

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We need to raise the max interest rate now. Is the only way to maintain this pool and create more fees for the AAVE protocol. Right now, with this situation we are losing deposits.

Haha, fair enough, but I’d point to the active lenders that seem to disagree :wink:

So, today AMPL has completed its rapid expansion cycle, and is currently trading around its rebasing target.

We still observe a ~70% utilization rate at the time of writing, and everything seems to be in order. Lenders and borrowers received a hefty increase in their AMPL allocation (proportional to the risk they took), we have a pool that allows for swaps between aAMPL and AMPL in case of 100% utilization, all the while the Aave treasury and it’s governors now own over 0.1% of the entire network of Ampleforth and received more fees than any other single market on the platform.

All in all, looks to me like a few rough edges can still be trimmed, but mission has been a success?

Let’s not forget that there is no use case as collateral for AMPL yet on Aave, and this too would change the game significantly, as it would grant a lot more freedom to AMPL lenders to also take bigger risks (and thus upside) when AMPL is rebasing upwards.

Of course, we should carefully study market behaviour more in-depth before going that route, and then consider a very low collateralization ratio for this. I would also say it is safe to say that some front end notice need to be given for AMPL as well, on top of the disclaimer about possibilities to exit the position via AMM during high utilization periods before walking down the rabbit hole further with this asset.

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Thanks to all for their insights on this important topic. Below, we at Gauntlet will try to summarize the valuable ideas mentioned in various threads and provide our perspective on the AMPL market.

In the current custom aAMPL implementation:

The desired behavior is for the borrowed token count (loan) to stay the same and not get affected by rebase. And the unborrowed amount to get affected by rebase while deposited in the AAVE protocol.

The aAMPL token is modified from generic AToken to achieve that behavior. The AMPL debt is denominated in fixed supply units and AMPL deposits are ‘partially’ elastic. such that the borrowed amount stays the same while the unborrowed amount gets scaled with rebase of AMPL token

Suppose there’s a positive rebase and the expected borrow interest paid is lower than the rebase amount. In that case, a rational borrower can make a profit by borrowing AMPL before the rebase and repaying it right after rebase. Here’s an example scenario described by pakim249.

To roughly formulate this, a borrower has an arbitrage opportunity if:

Note that the amount a user can borrow is limited by the available liquidity in the pool, so the opportunity doesn’t always exist. According to the formula, the borrow duration also plays an important factor, as mentioned by BlockEnthusiast. No matter how high the interest rate is, there’s always an arbitrage opportunity if the borrow duration is short enough during positive rebase. Therefore, raising interest rates can not completely avoid 100% pool utilization. However, it can make the AMPL borrower less profitable, and reduce the time of 100% pool utilization.

Another interesting aspect is that borrowers can compete on the timing of borrowing AMPL to arbitrage. If a borrower pulls the liquidity too late, the pool may not have available liquidity for them to arbitrage. Conversely, if a borrower borrows AMPL too early, they will overpay on the borrow interest.

We observe that the AMPL market has experienced large positive rebases (>3%) in the past two weeks. As a result, the AMPL market had consistently shown a high utilization rate due to rational borrower behavior. From an AMPL lender’s perspective, they cannot get the upside of positive rebases (via holding AMPL in a wallet), and they also cannot directly withdraw their liquidity from AAVE. The AMPL team created an aAMPL / AMPL pool to mitigate the issue by providing another option for lenders to withdraw their liquidity based on the market price.

At the end of the day, it’s up to the community to decide how the AMPL pool should operate. Gauntlet is conducting analysis to further explore various options. If the community wants to reduce the time of 100% pool utilization, one solution is that we can adopt Alex_BertoG’s line of thought and better align the borrow interest rate with rebase %. Another potential option is targeting the effective daily borrow rate at 95% utilization slightly above 95th percentile rebase % (~6%) distribution. However, as @brandon pointed out, this makes the market more unpredictable when the interest rate is above the optimal utilization. There’s no perfect parameterization under the current implementation. Community members need to balance the tradeoffs between maximizing the time of having available liquidity and minimizing the interest rate unpredictability by fine-tuning the interest rate curve.

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using AMPL as a guarantee could also retain depositors as long as what has been commented previously is implemented in relation to the interest rate, adjusting it according to the% of rebase. With this, high fees for AAVE would be achieved by reaching much more liquidity, a utilization rate lower than 100% and more deposits even when the excess is 0% or negative due to the new utility of ampl as collateral.

Thanks for chiming in Gauntlet, it’s fantastic to see the big brain energy enter into this conversation and confirm what we’ve been pretty much echoing here :innocent:

I would love to hear more about these slight modifications you hinted at in your post. You seem to have ran the numbers over many cycles, and I would love to see how slight adjustments to the rates would affect the meta-game here.

Thoroughly enjoyed hearing that we’re very close already, but that there is no perfect solution to this “problem” (which further assures we’re on the right track), and I’d be keen to hear how far you’d wish to propose the sliders be moved to create the perfect “AMPL-Game” so to say, on Aave.

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I’m late to the party but wanted to give an opinion as someone who wanted to use AMPL borrowing as a stable loan contract denomination, not as a speculative long position.

Let’s say I am a stablecoin borrower borrowing against my eth or btc. If denominate all my debt in standard stablecoins like USDC or USDT, I have a high risk of default on my loan during flash crashes. Before the AMPL pool was 100% utilized, it made sense to split the debt between USDC/T and AMPL, because since AMPL is NOT pegged it acts as a bit of a buffer during capital outflows from the crypto market.

The main reason I was excited about AMPL being on AAVE because of the alternative to centralized stablecoins to denominate debt. If we raise the interest rate, I believe it makes the AMPL on AAVE less useful for those who actually want longer term borrows, and don’t care about the day to day trading and change in pool utilization.

I unfortunately was forced to close my borrow because I couldn’t justify paying the max interest for the safer loan principal composition.

This is why I’m curious to explore @danbainbridge’s suggestion for a lower max interest rate, but I’m definitely not in favor of raising the interest rate because I don’t think long term borrowers should have to constantly deal with the risk of paying so much on their loan.

I encourage those who are skeptical to let AMPL play out longer, because there are many more use cases that will emerge, and as the market matures and more plumbing is put in place (the aAMPL/AMPL pool is an early example of that), the so called “problems” may just be the price discovery process happening for this new asset class.

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Raise or lower, the only thing it effects is the time at max utilization.
You’ll be paying near the same averaged rate, as that approaches the profit opportunity. Just a matter of how often its at max utilization.

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The desired behavior is for the borrowed token count (loan) to stay the same and not get affected by rebase. And the unborrowed amount to get affected by rebase while deposited in the AAVE protocol.

I’d just like to add that the desired behavior balances the long term lenders losses on positive rebase by gains on negative rebase, which can be attributed to long term borrowers who want exposure to token count but have no exposure to rebase.

As we can see from several comments across threads, users who were hopeful to participate in the long term borrow market in such a fashion have had their experience tainted by pursuits of short term positive rebase plays and the resulting impact on interest charged. In some cases, they have exited the market due to the issue of interest not need for exiting.

The market was intended for one set of participants. We can see realistically a different set of participants dominate. Its a battle ground between short term lenders and borrowers that long term participants are caught in the middle of.

Because of this, we may be misdiagnosing the need for exits AMMs as the solution for long term providers.Perhaps this is really a problem of short term liquidity getting edged out of jumping in and out of the pool around rebase. Lenders who can’t otherwise exit around rebase due to utilization sell to the LP, the LP eats the loss, the short term lenders re enter without facing issue. Pushes the victim down the road but doesn’t address the problem.

Even if this spillover of 100% utilization was kept ultra tight, the end result on long term borrowers is very high interest approaching rebase faced (which they aren’t holding onto if they buy a car with that debt). This pushes them to leave. Which results in low utilization on negative rebase long term. Likely pushing long term lenders to leave.

Is AAVE, or rather, interest rates charged over time, a good way to facilitate a short term market of active entry and exits on both sides?

From my perspective, this is a functionally different market from what was pitched.

Is this the market we wanted?
If not, honestly, are AMMs eating the loss of lenders the solution you see addressing this?
If not, does this market that actually exists before us belong on the main AAVE marketplace?

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