[ARFC] Increase Optimal Borrow Rates for Ethereum Stablecoin Markets

Borrowing Interest Rate Slope 1 Increase

We concur with the analysis provided by @monet-supply regarding the necessity of increasing interest rates for stablecoins and the potential benefits it can bring. In terms of the optimal value, we propose setting UOptimal above 5%:

  1. Our assessment of the average interest rates paid by borrowers indicates that the equilibrium borrowing rate presently hovers just above 5% for DAI and USDC, and approximately 6.5% for USDT. This is corroborated by data from other protocols.
  2. The broader macroeconomic context and the consistent upward trend in interest rates over the last six months suggest an ongoing rise in stablecoin interest rates. To accommodate some flexibility, given that the exact equilibrium borrowing rate cannot be pinpointed down to a few basis points, we advocate for setting the UOptimal interest rate slightly above the equilibrium interest rate.
  3. Interest rates are subject to fluctuations driven by diverse market dynamics external to traditional interest rates. In fact, in 2022, there was minimal to no correlation between stablecoin borrowing rates and interest rates on treasury bills. Part of the rationale behind slope 1 is precisely to offer a mechanism for balancing supply and demand across a spectrum. To ensure a seamless transition in the critical segment of the slope, i.e., around the equilibrium borrowing rate, it’s advisable to set the UOptimal borrowing rate slightly above this rate. Otherwise, it may experience frequent fluctuations on Slope 2.

In light of these considerations, our recommendation is to set the borrowing interest rates for Slope 1 for all USD stablecoins across Aave deployments at 5.5% as an initial step. Following this increase, we will continue monitoring the usage and equilibrium rate and make additional recommendations as necessary.

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Other Changes

One of the most effective ways to gauge the responsiveness of participants in financial markets is to measure the impact of alterations. When changes are isolated, specifically by modifying only one variable, the assessment of sensitivity to this change holds greater significance.

Furthermore, adjustments to Slope 1 may lead to repercussions that could influence decisions regarding the increase of UOptimal or RF. We propose a cautious approach - initiate the elevation of Slope 1 first. After observing and assessing the impact, weigh the risks against the potential benefits of modifying other parameters.

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