[ARFC] CRV Interest Rate Curve Upgrade

Risk General
9

Gauntlet Recommendations

After examining Llama’s IR curve recommendation, Gauntlet would recommend making the following changes to the proposal:

  • Setting the Uoptimal to 70%
  • Maintaining the Slope 2 at 300%.

Rationale:

CRV’s interest rate on Polygon v3 has averaged 32% (31% median) since Jan 1st. Llama’s proposed IR curve parameters would result in a utilization rate of ~83% in the Polygon v3 market if the borrow interest rate stays at 32%. As noted by Llama, borrowing demand has increased on Polygon v3 since the beginning of 2023. The demand for borrowing is expected to continue based on yields being offered to CRV holders and historical borrowing demand.

We recommend setting the Uoptimal at 70% and maintaining Slope2 at 300% for the following reasons:

  • The market borrow rate on Polygon v3 is greater than the recommended Slope1 rate of 14%. Utilization above 80% would place the liquidity pool at high risk of preventing suppliers from withdrawing collateral and increase the risk of failed atomic liquidations. The proposed interest rate curve is not calibrated to manage liquidity risk and maintain utilization below the Uoptimal if market demand continues at 32% (or higher). Thus we recommend to calibrate the Uoptimal point lower and maintain Slope2 at 300% in order to increase the likelihood of ample liquidity within the pool.
  • Whale user 0x7a16ff8270133f063aab6c9977183d9e72835428 has a balance of 83M CRV, representing 75% of supplied assets in the v2 ETH pool. Even though borrowing is disabled, there are still risks associated with increasing the Uoptimal to 80% and decreasing the Slope2 rate. The CRV borrowing market on v2 ETH is still active with borrows at $41.8M (6th largest on ETH v2 market) and utilization rate at 41%. Changes to Uoptimal and Slope2 curves would minimize the IR risk levers by discouraging new supply to come into the pool if suppliers were to start withdrawing. Lower incentives for suppliers when the CRV ETH market reaches high utilization might create liquidity issues for this highly concentrated market. We recommend more conservative IR parameters in order to maintain ample liquidity within the pool. Similar to the ETH v2 market, Polygon v3’s market is compromised of large positions as well. The top 5 suppliers on Polygon v3 represent approximately 54% of supply in the liquidity pools.

CRV Account Supply Concentration per Market

We recommend recalibrating the Uoptimal point to 70% and maintaining the Slope2 rate at 300 and to monitor how the market performs after implementing the proposed IR parameters prior to increasing Uoptimal or adjusting the Slope2 lower.

Parameter Current Proposed Gauntlet
Uoptimal 45 80 70
Base 0 3 3
Slope1 7 14 14
Slope2 300 150 300
Polygon v3 Reserve Factor 10 20 20
4 Likes