[ARFC] Update USDS & GHO Borrow Rate

title: [ARFC] Update USDS & GHO Borrow Rate
author: @TokenLogic
created: 2025-02-02


Summary

The Sky Savings Rate (SSR) is expected to be lowered from 12.50% to 9.50% on February 10th. This publication proposes updating the USDS Borrow Rate and also, reducing the GHO Borrow Rate on the Prime instance.
This update will be conducted via a Direct-to-AIP process.

Motivation

In response to the latest proposal to reduce the SSR to 9.50%, this publication proposes reducing the Base on Core and Slope1 on Prime by 3.00% respectively.

The chart below shows the USDC and USDT deposit rates on Aave relative to the SSR over the last 90 days. More recently, the SSR has materially outperformed USDC and USDT deposit yield on Aave due to the borrow rate for USDC and USDT continually declining since mid-december.

Screenshot 2025-02-02 at 13.39.12

The GHO Borrow Rate on Core is currently configured at 9.00%, representing a cost of capital of 9.42% for non stkAAVE holders. 9.42% compares favourably to the SUSDS Deposit Yield (Native + Incentives) of 13.42% + SPK airdrop rewards.

Screenshot 2025-02-02 at 13.51.46

When the SSR is reduced to 9.50%, the USDS collateral and GHO debt free carry trade remains profitable with compressed margins until such time as the GHO Borrow Rate is lowered. Notably, over the last 30 days, wallets holding USDS deposits on Core have borrowed +1,108,212 units of GHO representing a small portion of newly borrowed GHO.

With the GHO Steward role in place on Core, the GHO Borrow Rate can be reduced with short notice and therefore, this publication focuses on adjusting the Prime instance of Aave where the GHO Steward role is not yet extended.

Screenshot 2025-02-02 at 14.45.54

With the USDS Borrow Rate, Slope1 parameter, being reduced by 3.00% this publication proposes reducing the GHO Borrow Rate, Base parameter by 1.50%. Upon implementing both Borrow Rate updates, the GHO Borrow Rate at the Uoptimal will be 0.50% less than USDS. A slightly lower GHO Borrow Rate provides an economic incentive to hold GHO debt relative to USDS.

By the time this proposal is implemented on-chain, the GHO Stewards are expected to have reduced the GHO Borrow Rate on Core and any further change to GHO Borrow Rate on Prime to fall within the 0.50% adjustment capable via the Risk Steward role.

Specification

Prime Instance

USDS

Detail Current Proposed Change
Base 0.75% 0.75% 0.00%
Slope1 11.75% 8.75% -3.00%
Slope2 35.00% 35.00% 0.00%

Borrow Rate at Uoptimal 9.50% matching the proposed SSR.

GHO

Detail Current Proposed Change
Base 8.00% 6.50% -1.50%
Slope1 2.50% 2.50% 0.00%
Slope2 50.00% 50.00% 0.00%

Borrow Rate at Uoptimal 9.00% matching.

Core Instance

USDS

Detail Current Proposed Change
Base 11.75% 8.75% -3.00%
Slope1 0.75% 0.75% 0.00%
Slope2 35.00% 35.00% 0.00%

Borrow Rate at Uoptimal 9.50% matching the proposed SSR.

Disclosure

TokenLogic does not receive any payment for this proposal.

Next Steps

  1. Implement the proposed parameter changes via a Direct-to-AIP process.

Copyright

Copyright and related rights waived via CC0.

Summary

LlamaRisk supports the proposed updates to USDS (on Prime and Core) and GHO (on Prime) instances. Regarding GHO, continued stability and resumed supply growth enable more operating flexibility. The broader market’s borrow interest has also decreased, resulting in less yield-leveraging activities and reducing potential secondary market sell pressure on GHO. As indicated in previous GHO-related proposals, we should monitor for changes in leveraging activities and borrow rates of other established stablecoins on Aave’s instances to manage stability risks proactively. As for USDS, the changes are self-explanatory and align with the changes in Sky Savings Rate.

GHO Liquidity & Utilization

After a period of instability in November 2024 and subsequent risk measures, GHO’s sell-side liquidity has gradually increased. At the time of writing, sell-side liquidity under 1% price impact fluctuates between 3.4m and 5m. This is lower than previous levels but reflects GHO’s supply trends and is expected to continue increasing.


Source: TokenLogic GHO Analytics, 5th of February, 2025

It should be noted that the sell-side liquidity has been growing along with GHO’s supply. This indicates that minted GHO is redirected to other DeFi venues, shifting the secondary market pressures. More precisely, there has been resumed growth in stkGHO supply, with part of that amount (20m) being redirected to Spectra’s platform. Fluid integration has also been successful, resulting in 11.5m of GHO supplied in this venue.


Source: TokenLogic GHO Analytics, 5th of February, 2025

Source: DefiLlama, 5th of February, 2025

This indicator of improving stability can be continued thanks (@TokenLogic) to a measured approach to managing GHO borrow rates and utilization.

Borrow rates

At the time of writing, GHO Stewards have implemented a reduction in GHO borrow rates on Prime instance. The non-discounted rate is now 8.33%, which is still slightly above the borrow rates of USDC, USDT, and DAI. USDS has a higher borrow rate temporarily until the changes in this proposal are implemented. All of this is in line with the rationale of keeping GHO’s borrow rate on par with rates of established stablecoins on Aave’s Core instance.

Source: Aave Core, 5th of February, 2025

These borrow rates are still attractive to borrowers, as reflected in the borrow cap utilization. We currently see no incremental risk if this supply cap is to be further increased after this proposal is implemented.

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.

1 Like

Following an amendment to the SSR proposal on Sky’s governance forum, the following parameters are being proposed.

Prime Instance

USDS

Detail Current Proposed Change
Base 0.75% 0.75% 0.00%
Slope1 11.75% 8.00% -3.75%
Slope2 35.00% 35.00% 0.00%

Borrow Rate at Uoptimal 8.75% matching the proposed SSR.

GHO

Detail Current Proposed Change
Base 8.00% 5.75% -2.25%
Slope1 2.50% 2.50% 0.00%
Slope2 50.00% 50.00% 0.00%

Borrow Rate at Uoptimal 8.25% matching.

Core Instance

USDS

Detail Current Proposed Change
Base 11.75% 8.00% -3.75%
Slope1 0.75% 0.75% 0.00%
Slope2 35.00% 35.00% 0.00%

Borrow Rate at Uoptimal 8.75% matching the proposed SSR.

2 Likes

My main issue with Prime GHO rate is the very low supply rate compared to the borrow rates (the delta) and secondly the supply cap.

Prime GHO is a good opportunity for integrators to offer GHO yield that is redeemable (i.e. GHO staking is another option however comes with cooldown or redemption costs).

@TokenLogic @LlamaRisk would be great to enable an attractive variable GHO yield on Aave mainnet (Arbitrum already has it and Base deployment on its way) and increase the supply cap.

2 Likes

With the Balancer v3 Boosted Pool launching today and direct incentives available via Aura’s gauge, the GHO Steward are discussing increasing both Supply and Borrow Caps on Prime. Whilst the GHO Stewards do not yet have suitable permissions to implement a change on Prime, any change to the Supply and Borrow Caps can be implemented by the Risk Stewards.

To increase the GHO deposit yield on Prime, the utilisation of the GHO reserve needs to improve and for this to occur, the Borrow Cap is to be raised. Allowing GHO to be borrowed requires careful consideration for how this could affect the peg.

2 Likes

Overview

Chaos Labs supports the proposed updates to USDS and GHO borrow rates on the Ethereum Prime instance. The reductions in borrowing costs ensure the alignment of the rates with their target levels. However, we recommend a slight modification to the Ethereum Core USDS parameters to enhance market flexibility and the withdrawal of the GHO supplied by the Prime Facilitator.

Motivation

The reduction in USDS Slope1 on the Prime instance aligns well with the recent adjustments in the Sky Savings Rate. This will improve capital efficiency by making borrowing more attractive, driving demand for USDS in Aave’s ecosystem.

Additionally, lowering the GHO Base rate on the Prime instance ensures that the cost of borrowing remains in sync with the Ethereum GHO facilitator. This incentivizes GHO demand from within the Prime instance, leading to higher utilization and supply rates for users and Aave Treasury, fostering further supply growth and reinforcing its role as a key asset on Aave.

USDS (Ethereum Core)

While we support reducing USDS’s Base on the Ethereum Core market, we recommend an alternative adjustment to improve interest rate responsiveness.

Currently, the high Base rate compared to Slope 1, which is set on the Core market, causes significant inefficiency. The small change between the Interest rate at 0% utilization and the interest rate at UOptimal causes the market to be inflexible to market changes. For this reason, the market’s utilization changes drastically following minimal changes in the wider market interest rates.

To improve the market’s adaptability and, as a result, improve supply rate and incentive efficiency, we recommend starting a gradual process of lowering the Base while increasing Slope 1 to provide a wider interest rate range.

In this proposal, we recommend reducing the Base by an additional 1% while increasing the Slope by the same value.

The gradual change aims to avoid drastic jumps in interest rates caused by the current underutilization of the pool.

GHO Prime Facilitator

At present, approximately half of the 20M GHO supply in Ethereum Prime originates from the Prime facilitator, yet utilization remains only 8%. This causes the interest rate for supplying GHO to be only 0.57%, hence limiting the attractiveness of Balancer’s aGHO liquidity pools. In addition, this low utilization limits revenue generation from the facilitator, making it a poor tradeoff.

To optimize GHO’s supply-side rate, we recommend withdrawing the facilitator funds deposited in the GHO Prime’s pool. This, combined with the current borrow cap and the lowered interest rate is expected to drive a meaningful supply side rate, which further incentivizes the Balancer pools, driving liquidity for the asset.

We recommend re-supplying the GHO minted through the facilitator in the market when the demand for GHO grows and the target utilization is neared.

Specifications

Prime Instance

USDS

Detail Current Proposed Change
Base 0.75% 0.75% 0.00%
Slope1 11.75% 8.00% -3.75%
Slope2 35.00% 35.00% 0.00%

Borrow Rate at Uoptimal 8.75%, matching the proposed SSR.

GHO

Detail Current Proposed Change
Base 8.00% 5.75% -2.25%
Slope1 2.50% 2.50% 0.00%
Slope2 50.00% 50.00% 0.00%

Borrow Rate at Uoptimal 8.25% targeting the Ethereum Facilitator.

Detail Current Proposed
GHO Facilitator Deposits 10,000,000 0

Core Instance

USDS

Detail Current Proposed Change
Base 11.75% 7.00% -4.75%
Slope1 0.75% 1.75% +1.00%
Slope2 35.00% 35.00% 0.00%

Borrow Rate at Uoptimal 8.75% matching the proposed SSR, targeting a wider Interest Rate Curve

Disclaimer

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

Copyright

Copyright and related rights waived via CC0

1 Like

Hello everyone.

This all looks good except for the base rate on Core USDS. The borrow rate of USDS should always be near or above the USDS Savings rate otherwise it opens up undesirable looping behaviour where people borrow USDS below the savings rate and deposit into Savings USDS.

I recommend @ChaosLabs amends this proposal to have the base rate for Core USDS be 8% rather than 7% and sticking with the slope1 of 0.75%.

1 Like