[ARFC] Stablecoin IR Curve Amendment on Aave V2 and V3

Summary:

A proposal to increase stablecoin Interest Rate parameters across all Aave deployments.

Motivation

Following the implementation of this AIP to increase stablecoin borrow rates across Aave V2 and V3 deployments, we continue to observe volatility in borrow rates across Aave deployments, given the upward market with various speculative investment strategies, leading to an incredible demand for leverage. We recommend a more aggressive increase of the Slope1 parameter to stabilize borrows under the UOptimal point.

Stablecoins Total Supply and Borrow: The data from the charts reflects an overall increase in both the supply and borrowing of stablecoins on the Ethereum V3 platform. From December 9th to March 6th we observed the following increases in supply and borrowing across USDC, USDT and DAI:

Asset Total Supply (M) - Dec 9th Total Supply (M) - Mar 6th Total Supply Increase (M) Supply Increase (%) Total Borrow (M) - Dec 9th Total Borrow (M) - Mar 6th Total Borrow Increase (M) Borrow Increase (%)
USDC 614 833 219 35.6% 550 761 211 38.3%
USDT 557 712 155 27.8% 476 654 178 37.3%
DAI 147 161 14 9.5% 129 149 20 15.5%
Total 1,318 1,706 388 29.4% 1,155 1,564 409 35.4%

We’ve observed an overall $388M increase (29.4%) in supply across USDC, USDT and DAI on Ethereum V3, and a $409M increase (35.4%) in borrows. This signifies a substantial demand for leverage, while concurrently enticing suppliers with consistently high and stable supply rates.

Interest Rate Analysis: Over the last few months, stablecoin borrow rates have hovered above the slope1 by quite a large margin, which, given the lack of a base_rate, effectively implies the optimal borrow rate. Since the AIP which increased slope1 from 5% to 6%, given the upward market with various speculative investment strategies, has led to an incredible demand for leverage.

Below we depict borrow rates over a highly granular timeframe, with snapshots taken approximately every 3 hours, followed by a simple moving average (MA) converted to the daily equivalent (approximately 8 snapshots/day) and a 7-day MA. Observation reveals that the rates have seldom aligned with the parameterized slope1, except for the period immediately following the slope1 adjustment from 5% to 6%, instead consistently scaling considerably higher.

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The extent of this upward deviation is illustrated in the histogram below, showing the differences between APR(t) and the slope1 value. The histogram peaks at around a 3-4% difference for USDC and DAI. However, USDT exhibits a broader range of variance, resulting in a fatter tail in upward deviations from the slope1 value.

Computing both the geometric and arithmetic mean over varying timeframes for the stablecoins mentioned above, we observe a significant recent uptick, accompanied by sustained rates priced well above slope1 by a substantial margin.

Mean Last 7 Days Last 14 Days Last 30 Days Last 60 Days Last 90 Days
USDC Interest Rate (Arithmetic) 12.29% 11.04% 9.89% 8.94% 8.91%
USDC Interest Rate (Geometric) 12.08% 10.83% 9.87% 8.58% 8.63%
USDT Interest Rate (Arithmetic) 14.46% 10.93% 10.34% 8.94% 9.04%
USDT Interest Rate (Geometric) 14.16% 10.05% 9.87% 8.26% 8.35%
DAI Interest Rate (Arithmetic) 9.64% 9.35% 9.28% 8.46% 8.73%
DAI Interest Rate (Geometric) 9.16% 9.07% 8.97% 7.89% 8.22%

Utilization Rate Analysis: Our continuous monitoring of the utilization rates post-AIP, setting Slope1 at 6%, shows sustained demand, with the utilization rate consistently maintaining a value above the 90% Uoptimal threshold.

image

Mean Last 7 Days Last 14 Days Last 30 Days Last 60 Days Last 90 Days
USDC Utilization 92.10% 91.68% 89.17% 91.04% 90.72%
USDT Utilization 92.82% 91.22% 88.76% 89.58% 88.77%
DAI Utilization 90.92% 90.97% 88.21% 88.33% 88.69%

Upon analyzing the percentage of time where utilization exceeded UOptimal, alongside the aggregate utilization rate across various timeframes, it’s apparent that the slope1 increase to 6% did not succeed in stabilizing utilization at or below UOptimal. This result can be attributed to evolving market dynamics, notably the recent surge in crypto asset prices.

Mean Last 7 Days Last 14 Days Last 30 Days Last 60 Days Last 90 Days
USDC Time Above Uoptimal 100.00% 100.00% 88.79% 81.97% 87.23%
USDT Time Above Uoptimal 100.00% 76.24% 75.70% 62.06% 66.98%
DAI Time Above Uoptimal 88.24% 94.06% 83.64% 68.38% 75.86%

Plotting various theoretically higher slope1 values as scalar values to accommodate the historical “time above uOptimal” relative to the rolling interest rate allows us to evaluate how “time above uOptimal” decays alongside a scaling slope1, based on the market-priced interest rate. Notably, the considerable surge in current interest rates (last 7 days) is evident, suggesting logarithmic decay as slope1 increases with recent rates, contrasting with a more linear or exponential decay observed over longer timeframes.

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Recommendations

The analysis indicates a necessity for further refinement of stablecoin interest rates. To align with the market conditions, we propose two potential slope1 alterations:

Conservative:

Adjust Slope1 of stablecoins to 8%

The proposal entails increasing Slope1 to 8% for stablecoins across all Aave deployments. This adjustment assumes that current rates will regress to a longer-term mean, as seen over the last 60-90 days. Factoring in the impact of interest rates above a certain Uoptimal with a higher Slope1 value, an interim Slope1 value of 8% is expected to strike a balance with historically determined priced-in borrow rates. Despite the recent trend of rates skyrocketing and stabilizing above this value over the last month, a more gradual approach will enable us to thoroughly assess the situation going forward.

Aggressive:

Adjust Slope1 of stablecoins to 10%

We are proposing a significant increase in Slope1 to 10% for stablecoins across all Aave deployments. This additional adjustment aims to establish a more predictable and stable borrowing rate, ensuring an equilibrium utilization under the UOptimal point. This decision is made considering the recent substantial spike, with the assumption that rates will either remain sustained or continue to grow in the current risk-on market environment.

Following either of these increases, we will continue monitoring the usage and equilibrium rate and make additional recommendations as necessary.

Market Asset Current Slope1 Rec Slope1 Conservative Rec Slope1 Aggressive
Ethereum V2 USDC 6% 8% 10%
Ethereum V2 USDT 6% 8% 10%
Ethereum V2 FRAX 6% 8% 10%
Ethereum V2 sUSD 6% 8% 10%
Ethereum V2 GUSD 6% 8% 10%
Ethereum V2 LUSD 6% 8% 10%
Ethereum V2 USDP 6% 8% 10%
Ethereum V3 USDC 6% 8% 10%
Ethereum V3 USDT 6% 8% 10%
Ethereum V3 FRAX 6% 8% 10%
Ethereum V3 LUSD 6% 8% 10%
Avalanche V2 USDC 6% 8% 10%
Avalanche V2 USDT 6% 8% 10%
Avalanche V2 DAI 6% 8% 10%
Avalanche V3 USDC 6% 8% 10%
Avalanche V3 USDT 6% 8% 10%
Avalanche V3 DAI 6% 8% 10%
Avalanche V3 MAI 6% 8% 10%
Avalanche V3 FRAX 6% 8% 10%
Polygon V2 USDC 6% 8% 10%
Polygon V2 USDT 6% 8% 10%
Polygon V2 DAI 6% 8% 10%
Polygon V3 USDC 6% 8% 10%
Polygon V3 USDT 6% 8% 10%
Polygon V3 DAI 6% 8% 10%
Polygon V3 MAI 6% 8% 10%
Polygon V3 USDC.e 7% 9% 11%
Optimism V3 USDC 6% 8% 10%
Optimism V3 USDT 6% 8% 10%
Optimism V3 DAI 6% 8% 10%
Optimism V3 sUSD 6% 8% 10%
Optimism V3 LUSD 6% 8% 10%
Optimism V3 MAI 6% 8% 10%
Optimism V3 USDC.e 7% 9% 11%
Arbitrum V3 USDC 6% 8% 10%
Arbitrum V3 USDC.e 7% 9% 11%
Arbitrum V3 USDT 6% 8% 10%
Arbitrum V3 DAI 6% 8% 10%
Arbitrum V3 LUSD 6% 8% 10%
Arbitrum V3 FRAX 6% 8% 10%
Arbitrum V3 MAI 6% 8% 10%
Base V3 USDbC 7% 9% 11%
Base V3 USDC 6% 8% 10%
Metis V3 USDC 6% No Change No Change
Metis V3 USDT 6% No Change No Change
Ethereum V3 crvUSD 5% 8% 10%
Ethereum V3 pyUSD 6% No Change No Change
BNB Chain V3 USDT 6% 8% 10%
BNB Chain V3 USDC 6% 8% 10%
BNB Chain V3 FDUSD 6% No Change No Change
Scroll V3 USDC 6% 8% 10%

Next Steps

  1. Following community feedback, submit the ARFC for a snapshot vote for final approval.
  2. If consensus is reached, submit an Aave Improvement Proposal (AIP) to implement the proposed updates.
  3. We believe this adjustment will align the protocol’s rates more closely with current market conditions and borrower behavior. Based on the outcomes, potential future steps include:
  • Increasing UOptimal:

    This move would signify a higher threshold before Slope 2 interest rates are triggered. With the increase in Slope1, the underlying interest rate volatility is expected to diminish, leading to decreased demand above the kink. Consequently, by raising UOptimal, we can anticipate a similar utilization rate outcome as today, while offering a relatively higher incentive for new deposits if UOptimal is reached.

    We will conduct a comprehensive analysis of the historical concentration and distribution of supplied stablecoins used as collateral (generally quite minimal). Subsequently, we will determine an appropriate increase in Uoptimal, ensuring an adequate buffer to facilitate theoretical liquidations and supplier withdrawals. Opting for the more aggressive approach of 10% is likely to yield a greater increase in the Uoptimal value compared to 8%, as the higher Slope1 value is expected to foster a more stable utilization rate, thereby minimizing fluctuations driven by market-priced rate movements.

  • Further increase of Slope 1: Depending on the market’s and community’s response to the initial adjustment, a subsequent increase in Slope 1 could be considered to further optimize the IR curves.

As always, our priority remains to monitor these developments closely and provide timely, data-driven recommendations to maintain Aave’s competitive edge and market responsiveness.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this ARFC.

Copyright

Copyright and related rights waived via CC0

3 Likes

Follow-up post-DSR increase to 15% APR

Following the recent increase in sDAI APR from 5% to 15%, aimed at maintaining adequate DAI demand and alleviating DAI selling pressure in the current risk-on market, we anticipate stablecoin rates to rise significantly above the initially proposed slope1 values due to the rate arbitrage opportunity. Therefore, we are revising our initial “conservative” and “aggressive” slope1 recommendations accordingly.

Our updated “conservative” value will be set at 12%, assuming that rates will revert to a longer-term mean similar to current levels. This adjustment considers the effective cost and anticipates the closure of existing DAI CDPs due to increased stability fees alongside the rising demand for sDAI deposits. As a result, sDAI rates are expected to revert or gradually decrease over time. While this is still a significant increase, the current trend in stablecoin rates suggests a need for a middle ground to align with the short-term expected rate hike. This is particularly relevant given the unexpected duration until the aforementioned rate decreases, considering the size of the MakerDAO reserves.

Our recommendation of 14% for slope1 implies a convergence towards the expected yield of sDAI, aimed at mitigating short-term rate volatility and discouraging deviations above UOptimal. If the yield on sDAI decreases or the market-priced stablecoin rate reverts to a decreased value, we will adjust slope1 accordingly.

Adjusted Recommendations

Market Asset Current Slope1 Rec Slope1 Conservative Rec Slope1 Aggressive
Ethereum V2 USDC 6% 12% 14%
Ethereum V2 USDT 6% 12% 14%
Ethereum V2 DAI 6% 12% 14%
Ethereum V2 FRAX 6% 12% 14%
Ethereum V2 sUSD 6% 12% 14%
Ethereum V2 GUSD 6% 12% 14%
Ethereum V2 LUSD 6% 12% 14%
Ethereum V2 USDP 6% 12% 14%
Ethereum V3 USDC 6% 12% 14%
Ethereum V3 USDT 6% 12% 14%
Ethereum V3 FRAX 6% 12% 14%
Ethereum V3 DAI 6% 12% 14%
Ethereum V3 LUSD 6% 12% 14%
Ethereum V3 pyUSD 6% 12% 14%
Ethereum V3 crvUSD 5% 12% 14%
Avalanche V2 USDC.e 6% 13% 14%
Avalanche V2 USDT 6% 12% 14%
Avalanche V2 DAI 6% 12% 14%
Avalanche V3 USDC 6% 12% 14%
Avalanche V3 USDT 6% 12% 14%
Avalanche V3 DAI 6% 12% 14%
Avalanche V3 MAI 6% 12% 14%
Avalanche V3 FRAX 6% 12% 14%
Polygon V2 USDC 6% 12% 14%
Polygon V2 USDT 6% 12% 14%
Polygon V2 DAI 6% 12% 14%
Polygon V3 USDC 6% 12% 14%
Polygon V3 USDT 6% 12% 14%
Polygon V3 DAI 6% 12% 14%
Polygon V3 MAI 6% 12% 14%
Polygon V3 EURA 4% 12% 14%
Polygon V3 EURS 6% 12% 14%
Polygon V3 jEUR 4% 12% 14%
Polygon V3 USDC.e 7% 13% 15%
Optimism V3 USDC 6% 12% 14%
Optimism V3 USDT 6% 12% 14%
Optimism V3 DAI 6% 12% 14%
Optimism V3 sUSD 6% 12% 14%
Optimism V3 LUSD 6% 12% 14%
Optimism V3 MAI 6% 12% 14%
Optimism V3 USDC.e 7% 13% 15%
Arbitrum V3 USDC 6% 12% 14%
Arbitrum V3 USDC.e 7% 13% 15%
Arbitrum V3 USDT 6% 12% 14%
Arbitrum V3 DAI 6% 12% 14%
Arbitrum V3 LUSD 6% 12% 14%
Arbitrum V3 FRAX 6% 12% 14%
Arbitrum V3 MAI 6% 12% 14%
Arbitrum V3 EURS 6% 12% 14%
Base V3 USDbC 7% 13% 15%
Base V3 USDC 6% 12% 14%
Metis V3 m.USDC 6% No Change No Change
Metis V3 m.USDT 6% No Change No Change
Metis V3 m.DAI 7% No Change No Change
BNB Chain V3 USDT 6% 12% 14%
BNB Chain V3 USDC 6% 12% 14%
BNB Chain V3 FDUSD 6% 12% 14%
Scroll V3 USDC 6% 12% 14%
Gnosis V3 WXDAI 6% 12% 14%
Gnosis V3 USDC 6% 12% 14%
Gnosis V3 EURe 4% 12% 14%

Increase Uoptimal to 92% for USDC, USDT and DAI on Ethereum V3

Motivation

The recent surge in both supply and demand in stablecoin markets, combined with the limited use of supplied stablecoins as collateral, provides an opportunity to enhance capital efficiency in the market. This enhancement is facilitated by the substantial increase in slope1 to align rates with market demand, achieved by raising the optimal utilization (Uoptimal) from 90% to 92%. Empirical data supports this proposal, as detailed below.

Historical Stablecoin Utilization as Collateral

To evaluate the feasibility of increasing UOptimal to improve capital efficiency, we examine the proportion of supplied stablecoins utilized as collateral. This analysis is critical because liquidations necessitate ample liquidity, and any adjustment to UOptimal must offer a suitable buffer to prevent the system from encountering excessively high utilization rate ranges.

Below, we present a time series of USDC, USDT, and DAI utilization as collateral relative to the total supplied value at a given time t. This metric quantifies the total dollar value of volatile debt collateralized by these stablecoins, providing insights into the relative “health” of the market and the potential effects of any theoretical upward price movement in the underlying debt asset.

USDC

Screenshot 2024-03-11 at 14.39.01

We observe minimal utilization of USDC as collateral over time, sitting just under 5% worth of debt today, with an inherent downward trend over the last few months. We note that the Morpho Aave V3 optimizer address holds a combination of wstETH and USDC, with the majority in wstETH, which effectively serves as collateral for WETH debt. Consequently, approximately 70% of the WETH debt in the above chart can be discounted, as the wstETH effectively collateralizes the WETH debt, not the supplied USDC.

USDT

Screenshot 2024-03-11 at 14.44.50

Since the introduction of USDT as a collateral asset in July 2023, its utilization for volatile debt assets has remained minimal, hovering around the 2.5% mark.

DAI

Screenshot 2024-03-11 at 14.45.38

Liquidations

Over the last 90 days, despite ETH doubling in price, only $1.8 million worth of collective USDC, USDT, and DAI collateral has been seized through liquidations on Ethereum V3, with 61% of this value originating from DAI collateral. This amount represents just 0.1% of all currently supplied USDT, USDC, and DAI, indicating minimal leverage employed against stablecoins overall.

Screenshot 2024-03-11 at 14.10.23

Account Distribution

The dispersion of supplied stablecoin assets is a crucial metric in defining the user experience of stablecoin suppliers, ensuring ample liquidity for them to withdraw all or most of their supply according to the defined Uoptimal. Additionally, the concentration of debt backed by stablecoin collateral gauges the potential for some users to withdraw or get liquidated, which could lead to a significant shock in the system. Plotting the distribution of total supplied USDC, USDT, and DAI on a per-account basis, we observe a healthy distribution, with the majority of supplied accounts employing zero debt, resulting in an infinite health factor.

Screenshot 2024-03-11 at 11.56.19

Screenshot 2024-03-11 at 14.20.36
Note that the 3rd account is the aforementioned Morpho Optimizer.

Screenshot 2024-03-11 at 12.13.01

Historical Utilization Rate

In the last three months, the utilization rate has consistently remained above the current Uoptimal by approximately 0.5% to 2%, as depicted by the 7-day moving average of the utilization rate. Currently, yield convergence is observed at a 91.5% to 92% utilization rate, considering the current slope1 value of 6%. This trend is primarily attributed to the exceptionally high USDe speculative yields and the general demand for stable leverage in an upward market. The recent jump, however, can additionally be attributed to the increase in the sDAI rate to 15%.

Screenshot 2024-03-11 at 15.52.16

Based on the data regarding the utilization and distribution of stablecoin collateral presented above, we propose increasing UOptimal to 92% for USDC, USDT and DAI on Aave V3 Ethereum. This adjustment, coupled with an elevated slope1, aims to maintain market competitiveness and reduce volatility in the stablecoin market.

Capital Efficiency Increases

Screen Shot 2024-03-11 at 21.49.44

Recommendations

Asset Current Uoptimal Recommended Uoptimal
USDC 90% 92%
USDT 90% 92%
DAI 90% 92%
3 Likes

We have published a Snapshot for the community to vote on, starting in 24h.

We thank you in advance for your participation in the vote.

The Snapshot vote favored the aggressive option, setting slope1 at 14%. However, given the anticipated reduction of DSR to 13%, we suggest adopting the conservative option in the AIP. To streamline governance and expedite IR updates, we propose implementing the conservative option through an AIP, without an additional Snapshot vote, adjusting slope1 to 12%.

Acknowledging the dynamic nature of rates, we continue to monitor and provide recommendations as needed.

5 Likes

Hello,

With the ACI, in the context of Skywards we’re implementing this AIP on Bahalf of Chaos labs.

After discussion with relevant service providers, we would like to clarify the implementation intent with the following specification:

This AIP update the Slope1 parameters of Aave stablecoins to 12% Bridged USDC is raised to 13% to enable native USDC a competitive advantage. It also increase the uOptimal parameter of DAI, USDC & USDT assets to 92% on Aave V3 Ethereum..

These modifications allows Aave to adapt to current market conditions and stay competitive compared to the DSR rate.

This AIP is expected to drastically increase Aave DAO revenue.

3 Likes

So the initial analysis was done more than 2 weeks ago. Quite a bit has changed in the markets even in the 2 days. Can we get an updated analysis here? Are the proposed updates still competitive? Have the top positions changed? @ACI @ChaosLabs

AIP-69 has been published for this proposal, with voting starting in less than 24h.

Thank you in advance for your participation in the vote.

Since our initial analysis, stablecoin interest rates have remained volatile due to utilization rates exceeding the optimal threshold, causing fluctuations across various markets. Specifically, on V3 Ethereum, the average borrowing rates for USDC, USDT, and DAI have been 11%- 12% over the last month. Coupled with the DSR APR being adjusted to 13%, we continue to recommend the parameters proposed.

Given the dynamic nature of the markets and the constant shifts in demand, we will continue to closely monitor these changes and make further updates as necessary.

Thanks for the update