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.
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