[ARFC] USDS borrow rate update on Core and Prime Instances

[ACI]

[ARFC] USDS borrow rate update on Core and Prime Instances

Author: ACI ( Aave Chan Initiative)

Date: 2024-11-22

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After discussing with Service Providers, the current proposal has been updated.
As this is a Direct to AIP proposal, it will be escalated directly as AIP, we will share when it’s live for a vote. 2024-11-27

Summary

This proposal recommends increasing the USDS Core Instance Base Rate (currently at 6.25%) and Slope1 (currently at 6.25%) on Prime Market.

Raising USDS borrowing rates ensures the SSR remains competitive, attracting demand while discouraging excessive borrowing at unsustainable levels.

We also propose pausing sUSDe operations in the Prime instance to focus on scaling USDS liquidity in the Core Market, where there is significant demand.

This is a Direct to AIP Proposal.

Motivation

Recent observations in the market have highlighted issues stemming from sUSDe in the Prime instance:

1. sUSDe’s Impact on USDS Borrow Rate:

   The presence of sUSDe is driving up the USDS Borrow Rate, creating pressure in the Prime Instance. The high rates pose a risk of cascading rebalances, particularly:

   • wstETH collateral migrates to Spark for USDS liquidity.
   • ezETH loopers exit due to spiking wstETH borrow rates.
   • Resulting in a significant outflow of AUM from the market.

2. Mismatch Between Liquidity and Risk:

   • The liquidity needs of sUSDe are not being met effectively, leading to imbalance.
   • The market is unable to accommodate the current sUSDe scale without affecting overall stability.

While at same time there is substantial Untapped Demand in the Core Instance:

• The substantial demand in the Core Instance presents an opportunity to scale USDS aggressively while mitigating risk.

Specification

1. Increase USDS Base Rate 3% on Core Instance and 3% Slope1 on Prime Instance

• Adjusting the borrow rate is a necessary step to manage the borrowing cost dynamics and balance the market risk posed by sUSDe.
• This adjustment should be implemented across both the Prime and Core Instances.

2. Pause sUSDe on Prime Instance

• Temporarily halt sUSDe operations in the Prime stance to stabilize the market and focus on optimizing the Core Instance.
• This pause will allow time to reassess the sizing of sUSDe based on available liquidity and market condition.

Parameter	Current	Proposed	Change
Prime Market
Base	0.75%	0.75%	No change
Slope1	6.25%	9.25%	+3%
Slope2	75%	75%	No change
Core Market
Base	6.25%	9.25%	+3%
Slope1	0.75%	0.75%	No change
Slope2	75%	75%	No change

Disclaimer

The ACI is not presenting this ARFC on behalf of any third party and is not compensated for creating this ARFC.

Next Steps

1. If consensus is reached on this ARFC, escalate this proposal directly to AIP for final confirmation and enforcement of the proposal

Copyright

Copyright and related rights waived via CC0.

[ChaosLabs]

Summary

Chaos Labs supports the proposal to adjust USDS borrow rates and pause sUSDe on the Prime Instance.

Analysis

Pause sUSDe on Prime Instance

There has been significant rate volatility in the Prime (formerly Lido) Instance, with spikes above UOptimal beginning November 18 and coinciding with a large increase in sUSDe supply.

Additionally, sUSDe’s APY has continued to increase, increasing the profitability of leveraged yield farming and increasing the borrow rates that users are willing to pay.

ethena.fi

As described in the Aave Instances Shift post by ACI, Liquid E-Modes have granted Aave significant granularity in controlling and promoting use cases. Given the relative sizes of the sUSDe markets — $144M in Core, $45M in Prime — as well as the larger size of stablecoin markets (to be used as borrowable liquidity against sUSDe), it is rational to begin to concentrate sUSDe’s leveraged yield use case in the Core Instance. Pausing sUSDe in Prime will not negatively affect existing users while also ensuring that the market and its associated debt do not grow.

USDS Rate Adjustment

Following the pause on sUSDe — Prime, it is likely that some of this activity, as well as future activity, will shift instead to Core, leading to more borrowing demand for USDS. USDS borrow rates on Core began to increase in conjunction with an increase in the Sky Savings Rate from 6.5% to 8.5% on November 17, with USDS borrow rate increasing from 6.5% on November 18 to 7.25%. Given this trend, alongside the effective repricing of the savings rate, it is appropriate to raise USDS’s borrow rate at UOptimal, with the proposed increase — from 7% at UOptimal to 9% — appearing sufficient to prevent borrow rate spikes.

On Prime, the proposed increase in Slope1 is likely to reduce instances of over-utilization, leading to more stable borrow rates.

Disclaimer

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

Copyright

Copyright and related rights waived via CC0

[ACI]

Thank you @ChaosLabs for your feedback.

As mentioned in the ARFC, this is a Direct to AIP, so feedback has been included, and AIP to be voted can be found here..

Vote will start later today.