Summary
This proposal includes a batch of changes related to the protocol parameters before the launch of v2: interest rate curve parameters, protocol fee split from borrow-lend spread, V2 Credit Account limits for the start, and liquidation fees in general.
Motivation
In the near future, v2 will be launched, the discussions on the configuration of which are already actively going on in the community (here and here). Based on these discussions - the main focus in v2 will be on leverage farming (Lido, Convex, Yearn mostly). As you already know, gearbox is a two-sided protocol, so parameter optimization is necessary in order to equalize the economic incentives of LP and leverage users.
Implementation
Interest rate fees & parameters
APY spread fee
APY spread fee: 50 (previous value - 10).
(that means that 66% of interest paid by borrowers goes to LPs, 33% to the DAO). The motivation for this decision is that the main reward for the LP will be in GEAR. Spread increase will allow to generate revenue for the DAO, that can later be used for additional incentives - for example, for the implementation of a referral program.
Interest rate curve
Given the upcoming Curve/Convex/Lido integrations, due to the bad market, farming yields have been compressed to as low as 3-4% for stablecoins. As such, the utilization curve is planned to be adjusted to have rates fluctuate on the Aave-like formula, but in the range of 1-2%. In a bull market or as DeFi grows slowly, these rates can be adjusted to a higher benchmark as yields will also go up, say 3-5%. Compressing the curve will help ensure that the borrow-APYs don’t render the strategies added to V2 unusable.
| Pool | r0 | r1 | r2 | U* |
|---|---|---|---|---|
| ETH | 0 | 2.5 (previously - 4) | 60 | 85 |
| BTC | 0 | 2.5 (previously - 4) | 60 | 85 |
| USDC | 0 | 1.5 (previously - 2) | 100 | 85 |
| DAI | 0 | 1.5 (previously - 2) | 100 | 85 |
| wstETH | 0 | 1 (previously - N/A) | 60 | 85 |
The choice of parameters based on the farming APY in the pools Convex/Lido/Yearn pools, which will be available in v2.
Liquidation fees & premium
If a Credit Account is liquidated, some percentage goes to a third-party liquidator (liquidation premium) who liquidated the account - and some percentage goes to Gearbox Protocol (liquidation fee). Current values are 5% and 2% accordingly.
V2 Credit Accounts (leverage side) will be launched with large minimums: 150k$+ of borrowed capital. Gearbox Protocol doesn’t really have a minimum collateral feature, more so a “minimum amount borrowed”. So $150K of minimum amount borrowed is in line with the previously communicated “50K collateral minimum” because nobody really takes 2x leverage. So that is equivalent to x4 leverage on 50K (50K x 4 where 150K is the amount of borrowed capital).
The reason for it - high gas costs for liquidate some LPs. Some data provided below:
| LP token | Unwrapping token | Gas to unwrap (max value)* |
|---|---|---|
| stkcvxFRAX3CRV | FRAX3CRV | 877858 |
| FRAX3CRV | 3Crv | 180670 |
| 3Crv | USDC | 152575 |
This values are obtained from the analysis of historical txs on mainnet. Full list you can find here
As you can see unwrapping Convex positions could cost almost 1.5M gas fees. Based on previous experience, during the liquidation period, the price of gas can be quite significant (see liquidations at Gearbox Dashboard). If there are 3-4 different LPs on a Credit Account, liquidation can cost up to ~6M gas. For ~$150k min of assets on Credit Account, 4% liquidation fee will be ~$6k which should be enough to cover this costs even for 500-600 gas price. So my suggestion is to set liquidation premium at 4%.
At the same time, I do not think that Gearbox DAO should earn a lot of liquidations at this point. Ttherefore, I suggest reducing the value to 1.5% from 2%. We can’t remove it completely, because it is necessary for the correct work of a fast collateral check (How Fast Check work | Gearbox Protocol Developer Docs) that reduces gas consumption for users when they are performing swaps and other atomic actions.
Conclusion
- Liquidation fee: 1.5%
- Liquidation premium: 4%
- Interest rate fee: 50
- Interest rate curve parameters: here.
PS: in the future, as rates differences increase, there would be a bigger buffer to play with. Either in the form of a revenue share from CAs, or somehow else.