[ARFC] wMATIC Interest Rate Update

Governance
1

title: [ARFC] wMATIC Interest Rate Update
author: @TokenLogic - @MatthewGraham & @defijesus
created: 2023-11-02

Summary

This publication proposes revising the wMATIC interest rate from 6.10% to 5.00% Aave v3 Polygon.

Motivation

Following on from previous discussions to reduce the wMATIC interest rate, here. This publication proposes reducing the Slope1 parameter from 6.10% to 5.00%. The 5.00% Slope1 parameter marginally exceeds the the current borrow rate and the two dominants LST APRs.

v3 wMATIC Borrow Rate: 4.74% APY (at time of writing)
MaticX APR: 4.68%
stMATIC APR: 4.30%

With the current borrowing rate for wMATIC, 4.74% APY, it exceeds the LST yield. As a result, users are not generating a positive return on looping the LST and wMATIC. Reducing the Slope1 to 5.00%, keeping utilisation constant, the borrow rate APY is reduced to 3.87%. At this level, the yield maximising strategy become profitable. Reducing the Slope1 parameter is the most effective way to stimulate wMATIC borrowing demand.

Lowering the Slope1 parameter will increase the utilisation of the wMATIC reserve. The new equilibrium scenarios are shown below:

  • Borrow rate 4.30% supports utilisation of 63.10%
  • Borrow rate 4.68% supports utilisation of 68.55%
  • Borrow rate 4.74% supports utilisation of 69.50%

For each equilibrium scenario above, the Aave DAO’s revenue increases.

Reducing the Slope1 to 5.00%, keeping utilisation constant, the deposit rate falls to 1.74% on v3. This compares favourably to the 0.53% deposit rate on v2. As a result, we do not expect to see any migration from v3 to v2 and propose no changes to the v2 wMATIC interest rate strategy.

Specification

Update the interest rate strategy as per below:

wMATIC Address: 0x0d500B1d8E8eF31E21C99d1Db9A6444d3ADf1270

variableRateSlope1: From 6.10% to 5.00%

All other parameters remain the same as the existing interest rate strategy.

Next Steps

  1. If consensus on ARFC stage is reached, escalate to ARFC snapshot stage.
  2. If ARFC snapshot stage outcome is YAE, TokenLogic will escalate to AIP stage.

Disclaimer

TokenLogic receives no compensation beyond Aave protocol for the creation of this proposal. TokenLogic is a delegate within the Aave ecosystem.

Copyright

Copyright and related rights waived via CC0.

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2

Thanks for pushing this forward, @TokenLogic. Gauntlet supports these recommendations to lower slope 1 for WMATIC. Much of our reasoning remains similar to before, we encourage the community to check out our previous analysis for more detail.

At a high level, lowering slope 1 for WMATIC may help to

  • Increase WMATIC borrowing and utilization
  • Incentivizing MATIC LST collateralized recursive borrowing by facilitating profitability
  • Lower risks associated with increased stablecoin borrowing against LST collateral, amidst lower MATIC LST liquidity

Back in September, we delayed our original recommendation to lower Slope 1 to 4.3% due to utilization spiking to Uopt. Decreasing slope 1 when utilization is at Uopt was unlikely to increase borrows further.

image

Additional recommendations

We also recommend an option 2 to lower slope 1 to 4.3% to allow profitable recursive loops across both MaticX (~4.85% APR) and stMATIC (~4.3% APR) when utilization = Uopt.

  • High spread between MaticX yield with stMATIC yield may cause equilibrium borrow rates for slope 1 = 5% to be higher than stMATIC yield.
  • As a result, lowering slope 1 to 4.3% may help increase recursive borrowing for stMATIC collateral more so than setting slope 1 to 5%.
  • Facilitating profitable recursive loops for stMATIC collateral reduces its risk profile.

From a protocol revenue perspective,

  • Compared to current WMATIC IR parameters, this option generates more borrow revenue should WMATIC utilization increase > 69%
  • Compared to slope 1 of 5%, assuming equilibrium borrow rates of 4.7%, this option generates slightly less borrow revenue (~$20k annualized) at utilization = Uopt

This option continues to preserve considerable supplier advantage on v3 Polygon relative to v2 Polygon for WMATIC (1.7% to 0.5% APR), so we do not expect to see reverse migration of WMATIC back to v2.

3

Hi @Gauntlet,

Thank you for expressing support for this proposal.

The current borrow rate for wMATIC is 5.17% on Polygon v3. As a result, we are reluctant to significantly reduce the Slope1 parameter beneath this value. We are expecting up to 5M wMATIC deposits soon which will reduce the borrow rate initially. Our preference is to revise the Slope1 parameter down gradually over time and monitor how the market responds.

Moving this proposal to Snapshot, the following options are to be presented:

  • YAE - Slope1 5.00%
  • YAE - Slope1 4.30%
  • NAY
  • ABSTAIN
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