Existing pool’s utilization parameters are as follows:
- USDC pool 24%
- DAI pool 38%
- WETH pool 22%
- WBTC pool 1%
One of the main goals of the protocol is to have borrowing demand. That is where the main revenue stream is coming from and where the organic passive side LP yield is derived from. Amongst many things like product USP, general market conditions, integrations, and other things - the viability of the APY curve also has a strong impact on how borrowers behave. This proposal is aimed at adjusting those parameters.
The main use case for Gearbox at the moment is leverage farming. See statistics here. Existing farming opportunities: Yearn yUSDC vault and Yearn yDAI vault (already attracted $1mln+ TVL each) for stable pools (USDC & DAI). That number is just a start, and with v2 many more opportunities will be coming. Anyway, APRs for yDAI and yUSDC (according yearn.finance website) are 1.99% and 1.62%. Here we are faced with 2 problems:
- current parameters of the interest rate curve do not allow increasing the utilization of pools, as this is unprofitable for leverage farmers.
- low utilization creates a large gap between borrow rate and deposit rate which affects to both customer segments: LPs earn low yield, CA users pay a lot for leveraging… See that in analytics.
- there are no leverage farming opportunities for WETH and WBTC pool, which will be fixed later on, especially with Lido stETH integration (see the bottom) coming out of audits soon.
Gearbox uses a semi-linear interest rate curve model for calculations of borrow APY (read more here). Math calculations showing dependency of interest rate curve parameters, farming APR and pool’s utilization are provided here. Following this model, it is necessary to adjust parameters for all 4 pools:
- Increase optimal pool utilization parameter U_opt to 85%
- Decrease r_1 parameters to 2% for USDC and DAI pools.
It should be noted that a decrease of r1 in the short term will lead to a decrease of deposit rate for LPs. However, it also motivates Credit Account users open more leveraged positions and increase pool utilization. As a result, spread between borrow rate and deposit rate will be decreased (for example, now USDC pool has 2.48% borrow rate and 0.85% deposit rate) in long term and LPs earn higher organic yields.
The current APYs should also not be taken at face value, as LPs are likely in the pools to either support the protocol or have a chance at the retroactive incentives, so this change doesn’t affect their incentives.
To enable leverage farming opportunity for WETH pool, I suggest adding stETH in the allowed tokens list to WETH pool’s credit manager. The V2 will enable to do much more with stETH, LPing on Curve and then on Convex, but this addition should at least be the start.
- stETH address: 0xae7ab96520de3a18e5e111b5eaab095312d7fe84
- stETH oracle: 0x86392dC19c0b719886221c78AB11eb8Cf5c52812
- stETH Liquidation Threshold: 82.5%
According to the model, adding stETH as collateral should lead to 70-80% pool utilization potentially.
Original discussion started here. Let’s continue now in this topic.
As the proposals are different in nature, usually, such voting should be split into two votes. If contributors & delegates decide that it’s better to do it this way, it can be done. But if there is general consensus at accepting both, we can bundle it for the sake of saving time as this was already discussed.