[ARFC] GHO Stewards - Adjust GHO Borrow Rate
Title: [ARFC] GHO Stewards - Adjust GHO Borrow Rate
Author: @karpatkey_TokenLogic, @ACI and @ChaosLabs
Created: 2024-12-10
Summary
The GHO Stewards is to increase the borrow rate from 12.50% to 14.50%, with compounding the effective rate is 15.6%.
Motivation
To improve the resilience of the peg and rebalance GHO’s liquidity distribution, the GHO Stewards implemented a 2.00% increase to the GHO Borrow Rate. The GHO Borrow rate over the last week has been materially lower than other stablecoins leading to new GHO being minted soon after any GHO is repaid.
With 5M of GHO from a single user expected to leave cooldown on the 11the December, most likely to repay an existing debt position, the GHO borrow rate is to be adjusted higher ahead user repaying GHO debt to better align with prevailing market conditions.
The progressive onboarding of sUSDe supports a higher stablecoin borrow rate environment for the immediate future.
Addressing Demand and Market Dynamics
In response to the Sky Savings Rate increasing to 12.5%, the Slope1 parameter across most stablecoin reserves is to be adjusted higher to 12.5%. More recently, the Aave stablecoin borrowing demand has continued to outpace the proposed Sky Saving Rate increases.
The following factors are key considerations for elevated borrowing demand:
- High native yield from USDC;
- Increase in Sky Savings Rate; and,
- Progressively onboarding sUSDe.
The sUSDe leverage trade, offering an return exceeding the long duration PTs on Pendle, is attracting considerable demand for debt. sUSDe users are the marginal user driving stablecoin demand that is dictating elevated borrow rates on the Core instance.
In the event the GHO borrow rate temporarily exceeds those of USDC and USDT, the progressive onboarding of sUSDe is expected to stimulate demand that highlights the attractiveness of the more predictable GHO borrow rate as a competitive edge in times of volatility.
GHO Liquidity
Despite recent borrow rate increases and DAO swaps, the composition of the 3pool has yet to undergo significant transformation. A 2.00% increases in GHO’s borrow rate is expected to help stabilize the market without adverse effects by reducing the compositions of GHO in DEX liquidity pools.
Trends in smaller pools remain in flux, with gradual shifts occurring, but the overall trajectory has not yet firmly reversed.
Given the sensitivity of various collaterals being used for free-carry (USDS and more recently USDC), raising the rates excessively could lead to a migration of debt to other stablecoins via the Paraswap v6 integration. The Paraswap v6 integration leads to direct GHO buying and debt repayment which supports the peg. With both USDC and USDT GSM able to supply GHO into the market, there is minimal risk GHO trades above peg for any material amount of time.
Observations of stkGHO Cooldown Behaviour
The appearance of stkGHO in cooldown is a notable trend. The data suggests this may have been influenced by the recent Merit rewards distribution last week, potentially signalling that users waited for Merit distribution before initiating cooldowns.
The behaviour of large holders entering cooldown presents an opportunity to adjust the GHO borrow rate to improve the composition in anticipation of a potential acceleration in this cooldown process towards a new equilibrium.
There is suitable GHO liquidity for users seeking to swap stkGHO to GHO with various limit orders in pace and liquidity on Maverick v2 as part of the Fast Pass initiative.
Specification
The GHO borrow rate is to be revised as follows:
| Description |
Current |
Proposed |
Increase |
| Borrow Rate |
12.50% |
14.50% |
2.00% |
The GHO Stewards will continue to monitor the GHO, with an emphasis on how stkGHO holders respond to this rate increase.
Next Steps
- Using the Direct-to-AIP process an AIP will be submitted to implement the proposal.
Disclaimer
Chaos Labs, ACI, TokenLogic and karpatkey have not been compensated by any third party for publishing this ARFC.
Copyright
Copyright and related rights waived via CC0.
