Summary
LlamaRisk supports this proposal. It should achieve its intended aim of creating fewer interest rate spikes, which both borrowers and suppliers value. The much less steep gradient for (Borrow APR) in the proposed slope 2 change diagram will result in a far more gradual increase in interest rate. A borrow at optimal utilization to Uoptimal +2 utilization under these new conditions will go from 4% APR to 40% instead of 4% to 80%. This should result in significantly more stability in rates.
In a period of high volatility or severe deleverage, this should lower the risk of interest rate spikes as more capital is withdrawn from Aave to repay loans elsewhere. As Slope2 comes into effect much earlier, the increased interest rate from these withdrawals will likely be much less volatile than shown in @ChaosLabs’ graph above. This should result in fewer liquidations, which, in turn, reduce volatility.
With this in mind, we also welcome @TokenLogic’s suggestion to re-enable WETH as collateral in the Prime instance. WETH is currently the only collateral on Prime’s ETH-correlated E-mode. By adding additional use cases for WETH in the form of enabling stablecoin borrows, the primary risk will be increased leverage ratios throughout Aave. This may result in volatility being amplified once again in times of high price instability. This effect could be reduced by introducing a WETH-Stable Prime Emode with clearer restrictions on which stables may be used.
Disclaimer
This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.