[ARFC] Increase Optimal Borrow Rates for Ethereum Stablecoin Markets

Governance
2

Gauntlet supports the recommendations by @monet-supply. Stablecoin utilization on Ethereum v3 has been consistently at Uopt, and US1Y and US2Y yields have been north of 5%, implying that slope 1 could be raised without compromising on utilization.

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We would also like to propose the following. We will share some more color below.

  1. raise slope 1 to 5% for USDC, USDT, DAI, FRAX, LUSD across all v3 deployments
  2. raise Uopt to 90% for USDC, USDT, DAI, FRAX, where applicable, across all v3 deployments
  3. raise RF from 20% to 25% for USDC, USDT, LUSD on v2 Ethereum

On raising slope 1 to 5% for USDC, USDT, DAI, FRAX, LUSD for all v3 deployments

Utilization across other chains is also consistently at Uopt. Slope 1 across v3 deployments is 4% for USDT, FRAX, DAI and 3.5% for USDC. Supporting IR parity across deployments also serves to increase borrow revenue without compromising on utilization.

On raising Uopt to 90% for USDC, USDT, DAI, FRAX, where applicable, across all v3 deployments

AIP-306, in addition to raising slope 1 to 5% for DAI, also raised Uopt from 80% to 90%. The reduction in DAI borrow rate volatility can also be attributed to this Uopt increase, which allowed more borrowers to come in at slope 1 borrow rates. Gauntlet believes raising Uopt for USDT, DAI, FRAX can increase borrow revenue without adding excess risk.

  • Currently, USDC is the only stablecoin with Uopt at 90%. The main considerations for setting Uopt to 90% is promoting enough liquidatable supply when liquidations of stablecoin collateral occur.
    • Assuming large market move, only 10% of supply is available for liquidation, instead of 20% should Uopt move to 90% and equilibrium utilization to rest at Uopt.
  • Given the current loanbook for stables, Gauntlet believes increasing Uopt to 90% does not add excess risk. The below graph shows cumulatively how much of each stablecoin is supplied at each LTV for Ethereum v3.
    • as an example, only 10% of USDC is supplied at 0.6 LTV and higher
    • 10% of DAI is supplied at 0.55 LTV and higher

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  • Other v3 deployments show similar structure. The market would need to move considerably abnormally for liquidation capacity to come into question for stablecoin collateralized liquidations for 90% Uopt.

On raising RF from 20% to 25% for USDC, USDT, LUSD on v2 Ethereum

AIP-306 also raised DAI RF on v2 Ethereum to 25%. This would bring RF parity for USDC, USDT, and LUSD to DAI, and help encourage supply migration from v2 to v3.

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