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:
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.