Follow-up post-DSR increase to 15% APR

Following the recent increase in sDAI APR from 5% to 15%, aimed at maintaining adequate DAI demand and alleviating DAI selling pressure in the current risk-on market, we anticipate stablecoin rates to rise significantly above the initially proposed slope1 values due to the rate arbitrage opportunity. Therefore, we are revising our initial "conservative" and "aggressive" slope1 recommendations accordingly.

Our updated "conservative" value will be set at 12%, assuming that rates will revert to a longer-term mean similar to current levels. This adjustment considers the effective cost and anticipates the closure of existing DAI CDPs due to increased stability fees alongside the rising demand for sDAI deposits. As a result, sDAI rates are expected to revert or gradually decrease over time. While this is still a significant increase, the current trend in stablecoin rates suggests a need for a middle ground to align with the short-term expected rate hike. This is particularly relevant given the unexpected duration until the aforementioned rate decreases, considering the size of the MakerDAO reserves.

Our recommendation of 14% for slope1 implies a convergence towards the expected yield of sDAI, aimed at mitigating short-term rate volatility and discouraging deviations above UOptimal. If the yield on sDAI decreases or the market-priced stablecoin rate reverts to a decreased value, we will adjust slope1 accordingly.

Adjusted Recommendations

Market	Asset	Current Slope1	Rec Slope1 Conservative	Rec Slope1 Aggressive
Ethereum V2	USDC	6%	12%	14%
Ethereum V2	USDT	6%	12%	14%
Ethereum V2	DAI	6%	12%	14%
Ethereum V2	FRAX	6%	12%	14%
Ethereum V2	sUSD	6%	12%	14%
Ethereum V2	GUSD	6%	12%	14%
Ethereum V2	LUSD	6%	12%	14%
Ethereum V2	USDP	6%	12%	14%
Ethereum V3	USDC	6%	12%	14%
Ethereum V3	USDT	6%	12%	14%
Ethereum V3	FRAX	6%	12%	14%
Ethereum V3	DAI	6%	12%	14%
Ethereum V3	LUSD	6%	12%	14%
Ethereum V3	pyUSD	6%	12%	14%
Ethereum V3	crvUSD	5%	12%	14%
Avalanche V2	USDC	6%	12%	14%
Avalanche V2	USDT	6%	12%	14%
Avalanche V2	DAI	6%	12%	14%
Avalanche V3	USDC	6%	12%	14%
Avalanche V3	USDT	6%	12%	14%
Avalanche V3	DAI	6%	12%	14%
Avalanche V3	MAI	6%	12%	14%
Avalanche V3	FRAX	6%	12%	14%
Polygon V2	USDC	6%	12%	14%
Polygon V2	USDT	6%	12%	14%
Polygon V2	DAI	6%	12%	14%
Polygon V3	USDC	6%	12%	14%
Polygon V3	USDT	6%	12%	14%
Polygon V3	DAI	6%	12%	14%
Polygon V3	MAI	6%	12%	14%
Polygon V3	EURA	4%	12%	14%
Polygon V3	EURS	6%	12%	14%
Polygon V3	USDC.e	7%	13%	15%
Optimism V3	USDC	6%	12%	14%
Optimism V3	USDT	6%	12%	14%
Optimism V3	DAI	6%	12%	14%
Optimism V3	sUSD	6%	12%	14%
Optimism V3	LUSD	6%	12%	14%
Optimism V3	MAI	6%	12%	14%
Optimism V3	USDC.e	7%	13%	15%
Arbitrum V3	USDC	6%	12%	14%
Arbitrum V3	USDC.e	7%	13%	15%
Arbitrum V3	USDT	6%	12%	14%
Arbitrum V3	DAI	6%	12%	14%
Arbitrum V3	LUSD	6%	12%	14%
Arbitrum V3	FRAX	6%	12%	14%
Arbitrum V3	MAI	6%	12%	14%
Arbitrum V3	EURS	6%	12%	14%
Base V3	USDbC	7%	13%	15%
Base V3	USDC	6%	12%	14%
Metis V3	USDC	6%	No Change	No Change
Metis V3	USDT	6%	No Change	No Change
BNB Chain V3	USDT	6%	12%	14%
BNB Chain V3	USDC	6%	12%	14%
BNB Chain V3	FDUSD	6%	12%	14%
Scroll V3	USDC	6%	12%	14%
Gnosis V3	sDAI	6%	12%	14%
Gnosis V3	WXDAI	6%	12%	14%
Gnosis V3	USDC	6%	12%	14%

Increase Uoptimal to 92% for USDC, USDT and DAI on Ethereum V3

Motivation

The recent surge in both supply and demand in stablecoin markets, combined with the limited use of supplied stablecoins as collateral, provides an opportunity to enhance capital efficiency in the market. This enhancement is facilitated by the substantial increase in slope1 to align rates with market demand, achieved by raising the optimal utilization (Uoptimal) from 90% to 92%. Empirical data supports this proposal, as detailed below.

Historical Stablecoin Utilization as Collateral

To evaluate the feasibility of increasing UOptimal to improve capital efficiency, we examine the proportion of supplied stablecoins utilized as collateral. This analysis is critical because liquidations necessitate ample liquidity, and any adjustment to UOptimal must offer a suitable buffer to prevent the system from encountering excessively high utilization rate ranges.

Below, we present a time series of USDC, USDT, and DAI utilization as collateral relative to the total supplied value at a given time t. This metric quantifies the total dollar value of volatile debt collateralized by these stablecoins, providing insights into the relative "health" of the market and the potential effects of any theoretical upward price movement in the underlying debt asset.

Liquidations

Over the last 90 days, despite ETH doubling in price, only $1.8 million worth of collective USDC, USDT, and DAI collateral has been seized through liquidations on Ethereum V3, with 61% of this value originating from DAI collateral. This amount represents just 0.1% of all currently supplied USDT, USDC, and DAI, indicating minimal leverage employed against stablecoins overall.

Account Distribution

The dispersion of supplied stablecoin assets is a crucial metric in defining the user experience of stablecoin suppliers, ensuring ample liquidity for them to withdraw all or most of their supply according to the defined Uoptimal. Additionally, the concentration of debt backed by stablecoin collateral gauges the potential for some users to withdraw or get liquidated, which could lead to a significant shock in the system. Plotting the distribution of total supplied USDC, USDT, and DAI on a per-account basis, we observe a healthy distribution, with the majority of supplied accounts employing zero debt, resulting in an infinite health factor.

Historical Utilization Rate

In the last three months, the utilization rate has consistently remained above the current Uoptimal by approximately 0.5% to 2%, as depicted by the 7-day moving average of the utilization rate. Currently, yield convergence is observed at a 91.5% to 92% utilization rate, considering the current slope1 value of 6%. This trend is primarily attributed to the exceptionally high USDe speculative yields and the general demand for stable leverage in an upward market. The recent jump, however, can additionally be attributed to the increase in the sDAI rate to 15%.

Based on the data regarding the utilization and distribution of stablecoin collateral presented above, we propose increasing UOptimal to 92% for USDC, USDT and DAI on Aave V3 Ethereum. This adjustment, coupled with an elevated slope1, aims to maintain market competitiveness and reduce volatility in the stablecoin market.

Recommendations

Asset	Current Uoptimal	Recommended Uoptimal
USDC	90%	92%
USDT	90%	92%
DAI	90%	92%