Thanks, @Llamaxyz, for revising the initial proposal by implementing interest rate model changes across all BAL liquidity pools in Ethereum v2, Polygon v3, and Polygon v2.
The proposed 14% interest rate at the optimal point is lower than the historical Polygon v3 market’s 30 day average borrow rate of 35% and Aura Finance’s staked auraBAL yield of 60%. Given the Aura staking yield, the breakeven utilization would be approximately 87% based on recommended IR parameters. The breakeven utilization represents the threshold at which the borrowing BAL to mint and stake auraBAL becomes unprofitable.
Polygon v3 BAL Borrow Rate
Gauntlet has concerns that the low optimal interest rate will have the following impact on BAL lending pools:
- Lending Pool utilization above the optimal point will lead to more volatile interest rates. If interest rates are volatile to small changes in pool utilizations, this has a risk of creating a bad user experience for Aave users. For example, an increase in utilization rate from 80% to 81% would increase the borrower rate by ~680 basis points (6.8%) if Slope 1 rate is set at 14%.
- High utilization might prevent suppliers from withdrawing collateral and increase the risk of failed atomic liquidations.
- The propose interest rate curve is not calibrated to manage liquidity risk and optimize utilization. We are concerned that the borrower cap mechanism is the only valve to minimize liquidity risk since the optimal point does not act as a deterrent for continued borrowing of BAL.
Gauntlet recommends changing the slope 1 rate to 40% in order to maintain utilization below the optimal point. Breakeven utilization based on staked auraBAL yield would decrease to 83%. The below chart compares Llama’s proposed interest rate curve vs Gauntlet’s 40% adjustment to Slope 2.