Thank you for educating me on pool utilization and its relation to interest regardless of the rebase 
, I was not aware of that. I donāt 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.
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 Iād point to the active lenders that seem to disagree 
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 itās 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?
Letās 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.
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 thereās 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. Hereās 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 doesnāt 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, thereās 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 lenderās 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, itās 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_BertoGās 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. Thereās 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.
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, itās fantastic to see the big brain energy enter into this conversation and confirm what weāve been pretty much echoing here 
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 weāre very close already, but that there is no perfect solution to this āproblemā (which further assures weāre on the right track), and Iād be keen to hear how far youād wish to propose the sliders be moved to create the perfect āAMPL-Gameā so to say, on Aave.
Iām 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.
Letās 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 donāt care about the day to day trading and change in pool utilization.
I unfortunately was forced to close my borrow because I couldnāt justify paying the max interest for the safer loan principal composition.
This is why Iām curious to explore @danbainbridgeās suggestion for a lower max interest rate, but Iām definitely not in favor of raising the interest rate because I donāt 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 āproblemsā may just be the price discovery process happening for this new asset class.
Raise or lower, the only thing it effects is the time at max utilization.
Youāll be paying near the same averaged rate, as that approaches the profit opportunity. Just a matter of how often its at max utilization.
Iād 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 canāt 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 doesnāt 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 arenāt 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?