Gauntlet Recommendation
tl;dr: The smart contracts for V3 wETH Interest Rate Strategy have incorporated the parameters that Llama has outlined in this post. However, these parameters from Llama are incorrect and do not represent the intent of their post, as shown by their charts and commentary.
The recommended strategy is confusing - the terminology used in the OP post is not correct according to how Aave docs/contracts define the variables. We are using the terminology as indicated in the Aave docs and interest rate curve strategy contract. Given the terminology in the Aave docs, Llama’s recommendation does not achieve the effect of lowering Borrow Interest Rates, though we are not clear on the full intent given the confusion in terminology.
If Llama intended the Slope1 parameter to represent the IR value at the Kink (which would seem to be the case based on their wstETH graph), that does not match the Slope1 parameter and should not be put into the live contracts.
All our analysis below uses the terminology as defined in the docs.
Analysis of WETH IR Curves
Llama justified their proposed WETH interest rate curve by suggesting that it would increase borrower demand by lowering the borrower interest rate, but the proposed curve actually increases the interest rate that borrowers pay at every level of utilization. The graph below shows the interest rates for suppliers and borrowers under the current and proposed interest rate curves, as the graph provided by Llama is incorrect:
The difference between the current and proposed curves is shown below:
As you can see above at every point in the curve, there is an increase in Interest Rates. This was not the intention of Llama’s post, given their charts.
When we noticed this we were concerned that this would launch with V3 based on the forum post here and markdown + contracts here. We recommend changing this ahead of V3 ETH launch.
Our recommendation
To summarize: We strongly recommend leaving the WETH curves as is on V2 and similarly setting the WETH curves on V3 to what is currently live on V2. We would be amenable to further adjusting these curves post-launch once we can agree on the correct settings for the interest rate curves and the community has more time to review.
Specifically, the below (using the terminology in the Aave contracts):
| Parameter | Current (%) |
|---|---|
| Uoptimal | 80.00 |
| Base | 0.00 |
| Slope1 | 5.75 |
| Slope2 | 80.00 |
| Reserve Factor | 15.00 |
Analysis of wstETH IR Curves
wstETH is not currently a listed asset, but there are several active proposals to list it to various markets. It is similar to stETH, which has been listed on Ethereum v2 since last Spring, but since borrowing has always been disabled for stETH, we have no data about how users respond to changes in interest rates. We agree with Llama’s strategy of starting with conservative parameters that can be tweaked later. We would note, however, that the graph in Llama’s post is incorrect according to Aave contracts terminology (though that doesn’t change too much on the IR curve).
The proposed optimal utilization of 45% is in line with the more volatile assets available on Aave (1INCH, AAVE, CRV, ENS, LINK, MKR, UNI). The maximum borrower interest rate (base + slope 1 + slope 2) that comes from these parameters is 87%, which is rather low: the closest points of comparison would be the stablecoins BUSD (104%), FRAX (79%), LUSD (79%), and TUSD (79%), as well as WETH (85.75% currently, 85.8% proposed). While there is a greater chance of utilization getting dangerously high when the maximum interest rates are this low, the use of borrow caps in Aave v3 markets can reduce the risks associated with this. We will monitor utilization following the asset listing of wstETH and may propose an increase in slope 2 depending on how the market evolves.
As a minor aside, the GH markdown for V3 has a small typo on the IR strategy for wstETH. BaseVariableBorrowRate should read 0.25% instead of 2.5%, however, the contract itself is correct.