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title: [ARFC] CRV Interest Rate Curve Upgrade Author: @Llamaxyz @MatthewGraham @dydymoon @scottincrypto Dated: 2023-01-11

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Simple Summary

@Llamaxyz presents a proposal to update the CRV interest rate parameters on the Aave Ethereum v2, Ethereum v3 (when deployed), Polygon v3, and Polygon v2 Liquidity Pools.

Abstract

The CRV Supply Cap on the Polygon v3 deployment is currently at 100% with borrowing costs of 7.18% with a Utilization of 44.48% relative to a 45% Uoptimal value, [1]. This proposal intends to increase the CRV Supply Cap on Polygon v3 deployment, improve the capital efficiency of each liquidity pool, and increase the amount of revenue generated across the various CRV reserves.

Capital efficiency is improved by increasing the Uoptimal value. Revenue is increased by introducing a Base interest rate, doubling the interest rate at the Uoptimal point, and aligning the Reserve Factor to 20% across all pools. This is expected to generate more revenue for the DAO and significantly reduce the amount of free CRV in aggregate across the Reserves.

Motivation

With the CRV Reserve on Polygon reaching its Supply Cap, this is an ideal time to implement an upgrade that addresses the Supply Cap and Interest Rate parameters. The current CRV Interest Rate reflects the original parameters implemented when the liquidity pools were deployed. The Interest Rate Parameters do not take into consideration the alternative use cases for CRV and consequently, Aave has missed out on revenue from the sustained borrowing demand.

Llama expects the sustained borrowing demand to continue due to the veTokenomics construct presenting several opportunities for CRV borrowers to earn yield. In this proposal, the Uoptimal parameter is to be increased from 45% to 80% improving the capital efficiency of the active reserves.

Specific to the Polygon v3 deployment, increasing the Uoptimal parameter from 45% to 80% will lead to an increase in the Borrow Cap, which is a function of the Supply Cap and Uoptimal parameter.

Borrow Cap = Supply Cap * (Uoptimal + 0.1)

The new Supply Cap parameter has been prepared by Chaos Labs, 1,125.24. This generates a new Borrow Cap of 1,012.72, [2].

With borrowing disabled on some Aave deployments, lending rates will drop and it will become rational for profit-driven actors to transition liquidity to the Reserve that offers the greatest yield. This has been playing out with demand on Polygon v3 increasing relative to other deployments.

The interest rate at the current Optimal point is 7%, which is low relative to current demand of 44,48% on Polygon v3. This proposal recommends increasing the interest rate (slope 1 parameter) to 14%, which is a 100% increase to the existing rate. Over time, we will be able to monitor the Reserve and amend the slope 1 parameter in an attempt to keep the utilization beneath the Optimal point for the majority of the time.

In addition, this proposal introduces a base rate of 3% and changes slope 2 from 300 to 150. This means at >0% utilization, the interest rate for borrowers is 3% and the gradient post-Optimal point is reduced, resulting in a less volatile interest rate for users with increasing utilization. The result will be a CRV interest rate equivalent to the BAL interest rate curve (which has a base 3%, slope 1 = 14%, and slope 2 = 150%).

The graphic below shows the changes in the interest rate.

The Reserve Factor on Polygon v3 is to be increased from 10% to 20%, bringing it in line with all other Aave deployments.

Specification

The below table shows the current and proposed changes to the CRV Reserve on Polygon v2, Polygon v3, Ethereum v2 and the soon to be deployed Ethereum v3 liquidity pool.

Polygon v3

Parameter	Current (%)	Proposed (%)
SupplyCap	937.70K	1,125.24K
BorrowCap	640.44K	1,012.72K
Uoptimal	45	80
Base	0	3
Slope1	7	14
Slope2	300	150
Reserve Factor	10	20

Polygon v2 - Frozen

Parameter	Current (%)	Proposed (%)
Uoptimal	45	80
Base	0	3
Slope1	7	14
Slope2	300	150
Reserve Factor	20	20

Ethereum v3 - Not yet deployed

Parameter	Current (%)	Proposed (%)
Uoptimal	NA	80
Base	NA	3
Slope1	NA	14
Slope2	NA	150
Reserve Factor	NA	20

Ethereum v2 - Frozen

Parameter	Current (%)	Proposed (%)
Uoptimal	45	80
Base	0	3
Slope1	7	14
Slope2	300	150
Reserve Factor	20	20

References

[1] https://app.aave.com/reserve-overview/?underlyingAsset=0x172370d5cd63279efa6d502dab29171933a610af&marketName=proto_polygon_v3 [2] https://governance.aave.com/t/aave-v3-borrow-caps-methodology/10925 [3] https://creativecommons.org/publicdomain/zero/1.0/

Copyright

Copyright and related rights waived via CC0, [3].