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
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
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
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.
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.
Note that the 3rd account is the aforementioned Morpho Optimizer.
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%.
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
Recommendations
| Asset | Current Uoptimal | Recommended Uoptimal |
|---|---|---|
| USDC | 90% | 92% |
| USDT | 90% | 92% |
| DAI | 90% | 92% |