eIP 15: Reduce Reserve Factors and Amend Interest Rate Models
Simple Summary
This proposal offers to reduce reserve factors on all cross and collateral assets, as well as to amend interest models.
Motivation
The motivation behind the proposal is to reduce the spread between the borrow and lending APYs. As of now, the spreads are way too wide even by DeFi standards:
The reason is two-fold:
- Reserve factor is too high
- Utilisation has gone down during market volatility
On (1), reserve factor of 0.23 means 23% of all the interest borrowers pay goes into reserves, ie lenders only get 77% of all the interest. This is arguably too much and lenders should be receiving more interest.
On (2), utilisation has decreased across the board as fewer people borrow from pools to liquidity mine $EUL. To illustrate:
USDC:
WETH:
DAI:
WBTC:
Why does utilisation affect the spread? Because if the lending pool contains $1,000,000 and only $100 is borrowed, the interest the borrowers pay on $100 is distributed across $1,000,000 worth of lent assets. Alternatively, if the entire $1,000,000 is being borrowed, then lenders get a lot more interest on average.
How to address (2) then? Increase utilisation by moving the kink further out and/or lowering the interest rate around the kink. This way, your borrow vs lending APY spreads are reasonable even at high utilisation levels.
Implementation
Exact smart contract implementation will be posted shortly.
Current Model
| Base IR | Kink IR | Max IR | Kink% | Reserve Factor | |
|---|---|---|---|---|---|
| USDC | 0% | 4% | 100% | 80% | 0.23 |
| WSTETH | 0% | 8% | 200% | 80% | 0.10 |
| WETH | 0% | 4% | 100% | 80% | 0.23 |
| DAI | 0% | 4% | 100% | 80% | 0.23 |
| WBTC | 0% | 8% | 200% | 80% | 0.23 |
| USDT | 0% | 20% | 300% | 80% | 0.23 |
| AGEUR | 0% | 4% | 100% | 80% | 0.23 |
| UNI | 0% | 20% | 300% | 80% | 0.23 |
| LINK | 0% | 20% | 300% | 80% | 0.23 |
| ENS | 0% | 20% | 300% | 80% | 0.23 |
| MATIC | 0% | 20% | 300% | 80% | 0.23 |
| OSQTH | 0% | 20% | 300% | 80% | 0.23 |
| RBN | 0% | 20% | 300% | 80% | 0.23 |
| SHIB | 0% | 20% | 300% | 80% | 0.23 |
| MKR | 0% | 20% | 300% | 80% | 0.23 |
| CVX | 0% | 20% | 300% | 80% | 0.23 |
| PERP | 0% | 20% | 300% | 80% | 0.23 |
| AXS | 0% | 20% | 300% | 80% | 0.23 |
New Model
| Base IR | Kink IR | Max IR | Kink% | Reserve Factor | |
|---|---|---|---|---|---|
| USDC | 0% | 1% | 100% | 80% | 0.02 |
| WSTETH | 0% | 1% | 200% | 80% | 0.02 |
| WETH | 0% | 1% | 100% | 80% | 0.02 |
| DAI | 0% | 1% | 100% | 80% | 0.02 |
| WBTC | 0% | 1% | 200% | 80% | 0.02 |
| USDT | 0% | 1% | 300% | 80% | 0.02 |
| AGEUR | 0% | 1% | 100% | 80% | 0.02 |
| UNI | 0% | 1% | 300% | 80% | 0.02 |
| LINK | 0% | 1% | 300% | 80% | 0.02 |
| ENS | 0% | 1% | 300% | 80% | 0.02 |
| MATIC | 0% | 1% | 300% | 80% | 0.02 |
| OSQTH | 0% | 1% | 300% | 80% | 0.02 |
| RBN | 0% | 1% | 300% | 80% | 0.02 |
| SHIB | 0% | 1% | 300% | 80% | 0.02 |
| MKR | 0% | 1% | 300% | 80% | 0.02 |
| CVX | 0% | 1% | 300% | 80% | 0.02 |
| PERP | 0% | 1% | 300% | 80% | 0.02 |
| AXS | 0% | 1% | 300% | 80% | 0.02 |
Risk Assessment
Assuming we only change the reserve factors to 0.02 without amending the interest rate models, we get the following improvement in lending APYs:
| Asset | Current Utilisation | Current Borrow APY | Current Lending APY | New Borrow APY | New Lending APY | RF Improvement |
|---|---|---|---|---|---|---|
| USDC | 51.07% | 2.55% | 1.00% | 2.55% | 1.28% | 0.27% |
| WSTETH | 38.00% | 3.80% | 1.30% | 3.80% | 1.42% | 0.12% |
| WETH | 45.45% | 2.27% | 0.80% | 2.27% | 1.01% | 0.22% |
| DAI | 28.81% | 1.44% | 0.32% | 1.44% | 0.41% | 0.09% |
| WBTC | 29.24% | 2.92% | 0.66% | 2.92% | 0.84% | 0.18% |
| USDT | 20.95% | 5.24% | 0.84% | 5.24% | 1.08% | 0.23% |
| AGEUR | 58.39% | 2.92% | 1.31% | 2.92% | 1.67% | 0.36% |
| UNI | 32.26% | 8.07% | 2.00% | 8.07% | 2.55% | 0.55% |
| LINK | 37.23% | 9.31% | 2.67% | 9.31% | 3.40% | 0.73% |
| ENS | 44.58% | 11.15% | 3.83% | 11.15% | 4.87% | 1.04% |
| MATIC | 10.27% | 2.57% | 0.20% | 2.57% | 0.26% | 0.06% |
| OSQTH | 9.00% | 2.25% | 0.16% | 2.25% | 0.20% | 0.04% |
| RBN | 73.39% | 18.35% | 10.37% | 18.35% | 13.20% | 2.83% |
| SHIB | 7.87% | 1.97% | 0.12% | 1.97% | 0.15% | 0.03% |
| MKR | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| CVX | 43.47% | 10.87% | 3.64% | 10.87% | 4.63% | 0.99% |
| PERP | 74.78% | 18.70% | 10.76% | 18.70% | 13.70% | 2.94% |
| AXS | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
These are rather decent in % terms, especially on the more liquid assets like USDC, WSTETH and WETH.
Next, if we amend the interest rate model WITHOUT changing the reserve factor. The rate model change is just changing the IR% at kink to 1%.
| Asset | Current Utilisation | Current Borrow APY | Current Lending APY | Current Spread | New Borrow APY | New Lending APY | New Spread |
|---|---|---|---|---|---|---|---|
| USDC | 51.07% | 2.55% | 1.00% | 1.55% | 0.64% | 0.25% | 0.39% |
| WSTETH | 38.00% | 3.80% | 1.30% | 2.50% | 0.48% | 0.16% | 0.31% |
| WETH | 45.45% | 2.27% | 0.80% | 1.48% | 0.57% | 0.20% | 0.37% |
| DAI | 28.81% | 1.44% | 0.32% | 1.12% | 0.36% | 0.08% | 0.28% |
| WBTC | 29.24% | 2.92% | 0.66% | 2.27% | 0.37% | 0.08% | 0.28% |
| USDT | 20.95% | 5.24% | 0.84% | 4.39% | 0.26% | 0.04% | 0.22% |
| AGEUR | 58.39% | 2.92% | 1.31% | 1.61% | 0.73% | 0.33% | 0.40% |
| UNI | 32.26% | 8.07% | 2.00% | 6.06% | 0.40% | 0.10% | 0.30% |
| LINK | 37.23% | 9.31% | 2.67% | 6.64% | 0.47% | 0.13% | 0.33% |
| ENS | 44.58% | 11.15% | 3.83% | 7.32% | 0.56% | 0.19% | 0.37% |
| MATIC | 10.27% | 2.57% | 0.20% | 2.36% | 0.13% | 0.01% | 0.12% |
| OSQTH | 9.00% | 2.25% | 0.16% | 2.09% | 0.11% | 0.01% | 0.10% |
| RBN | 73.39% | 18.35% | 10.37% | 7.98% | 0.92% | 0.52% | 0.40% |
| SHIB | 7.87% | 1.97% | 0.12% | 1.85% | 0.10% | 0.01% | 0.09% |
| MKR | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| CVX | 43.47% | 10.87% | 3.64% | 7.23% | 0.54% | 0.18% | 0.36% |
| PERP | 74.78% | 18.70% | 10.76% | 7.93% | 0.93% | 0.54% | 0.40% |
| AXS | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
The new spread is unsurprisingly tighter than the current spread.
Here's what happens if we decrease the IR% at Kink to 1% and the reserve factor to 0.02:
| Asset | Current Utilisation | Current Borrow APY | Current Lending APY | Current Spread | New Borrow APY | New Lending APY | New Spread |
|---|---|---|---|---|---|---|---|
| USDC | 51.07% | 2.55% | 1.00% | 1.55% | 0.64% | 0.32% | 0.32% |
| WSTETH | 38.00% | 3.80% | 1.30% | 2.50% | 0.48% | 0.18% | 0.30% |
| WETH | 45.45% | 2.27% | 0.80% | 1.48% | 0.57% | 0.25% | 0.32% |
| DAI | 28.81% | 1.44% | 0.32% | 1.12% | 0.36% | 0.10% | 0.26% |
| WBTC | 29.24% | 2.92% | 0.66% | 2.27% | 0.37% | 0.10% | 0.26% |
| USDT | 20.95% | 5.24% | 0.84% | 4.39% | 0.26% | 0.05% | 0.21% |
| AGEUR | 58.39% | 2.92% | 1.31% | 1.61% | 0.73% | 0.42% | 0.31% |
| UNI | 32.26% | 8.07% | 2.00% | 6.06% | 0.40% | 0.13% | 0.28% |
| LINK | 37.23% | 9.31% | 2.67% | 6.64% | 0.47% | 0.17% | 0.30% |
| ENS | 44.58% | 11.15% | 3.83% | 7.32% | 0.56% | 0.24% | 0.31% |
| MATIC | 10.27% | 2.57% | 0.20% | 2.36% | 0.13% | 0.01% | 0.12% |
| OSQTH | 9.00% | 2.25% | 0.16% | 2.09% | 0.11% | 0.01% | 0.10% |
| RBN | 73.39% | 18.35% | 10.37% | 7.98% | 0.92% | 0.66% | 0.26% |
| SHIB | 7.87% | 1.97% | 0.12% | 1.85% | 0.10% | 0.01% | 0.09% |
| MKR | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| CVX | 43.47% | 10.87% | 3.64% | 7.23% | 0.54% | 0.23% | 0.31% |
| PERP | 74.78% | 18.70% | 10.76% | 7.93% | 0.93% | 0.69% | 0.25% |
| AXS | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
It is important to consider the fact that lower rates across the board may cause higher utilisation. This increases liquidity risk. Let's see at what utilisation will borrow APYs match the current borrow APYs:
| Asset | Current Utilisation | Current Borrow APY | Current Lending APY | Current Spread | New Borrow APY | New Lending APY | New Spread | Utilisation where Current Borrow APY = New Borrow APY |
|---|---|---|---|---|---|---|---|---|
| USDC | 51.07% | 2.55% | 1.00% | 1.55% | 0.64% | 0.32% | 0.32% | 80.314% |
| WSTETH | 38.00% | 3.80% | 1.30% | 2.50% | 0.48% | 0.18% | 0.30% | 80.281% |
| WETH | 45.45% | 2.27% | 0.80% | 1.48% | 0.57% | 0.25% | 0.32% | 80.257% |
| DAI | 28.81% | 1.44% | 0.32% | 1.12% | 0.36% | 0.10% | 0.26% | 80.089% |
| WBTC | 29.24% | 2.92% | 0.66% | 2.27% | 0.37% | 0.10% | 0.26% | 80.193% |
| USDT | 20.95% | 5.24% | 0.84% | 4.39% | 0.26% | 0.05% | 0.21% | 80.283% |
| AGEUR | 58.39% | 2.92% | 1.31% | 1.61% | 0.73% | 0.42% | 0.31% | 80.388% |
| UNI | 32.26% | 8.07% | 2.00% | 6.06% | 0.40% | 0.13% | 0.28% | 80.473% |
| LINK | 37.23% | 9.31% | 2.67% | 6.64% | 0.47% | 0.17% | 0.30% | 80.556% |
| ENS | 44.58% | 11.15% | 3.83% | 7.32% | 0.56% | 0.24% | 0.31% | 80.679% |
| MATIC | 10.27% | 2.57% | 0.20% | 2.36% | 0.13% | 0.01% | 0.12% | 80.105% |
| OSQTH | 9.00% | 2.25% | 0.16% | 2.09% | 0.11% | 0.01% | 0.10% | 80.084% |
| RBN | 73.39% | 18.35% | 10.37% | 7.98% | 0.92% | 0.66% | 0.26% | 81.160% |
| SHIB | 7.87% | 1.97% | 0.12% | 1.85% | 0.10% | 0.01% | 0.09% | 80.065% |
| MKR | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 79.933% |
| CVX | 43.47% | 10.87% | 3.64% | 7.23% | 0.54% | 0.23% | 0.31% | 80.660% |
| PERP | 74.78% | 18.70% | 10.76% | 7.93% | 0.93% | 0.69% | 0.25% | 81.184% |
| AXS | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 79.933% |
As can be seen, the trade-off is that if borrow APYs are matched, the utilisation rises to about 80%. However, given the current market conditions and lower demand for leveraging up and $EUL liquidity mining (as can also be seen on Aave and Compound), it's unlikely utilisation will persistently spike to unsustainable levels.
Even if the market appetite for leverage massively increased over a short period of time, we can quickly propose more conservative kink models. At this point in the market, however, I think it's important Euler shows competitive interest rates with low spreads.
Conclusion
Lower RF and lower Kink IR will cause lower interest rates and tighter spreads between Borrow and Lending APYs, hence making Euler much more attractive for borrowing. The possible negative consequence is increase in average utilisation, which increases liquidity risk.
Given the current market conditions, it's unlikely we'll see spikes in utilisation. Hence we think it's appropriate to prioritise the tightening of spreads.
Off-Chain Vote
Timeline
Jul 14, 2022Proposal created
Jul 14, 2022Proposal vote started
Jul 20, 2022Proposal vote ended
Oct 26, 2023Proposal updated