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.
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
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