Proposal: Adjust Interest Rate parameters for ADA liquidity pools

Current ADA liquidity pools are set as ‘volatile’ assets, meaning it is cheaper to take out loans before reaching the optimal utilization rate of 45%. Take the ADA/LENFI pool as an example.

In this scenario, borrowers are unlikely to take new loans due to high interest rates, while depositors receive relatively low yields since active loans are not costly.

The pool has the following parameters:

  • Optimal utilization rate: 45%
  • Base interest rate: 3%
  • Slope1: 7.5%
  • Slope2: 300%

These parameters deter borrowers from taking out new loans as the cost increases significantly.

I propose opening a discussion to increase the base interest rate to 6% and reduce Slope2 to 100% for ADA supply pools.

This adjustment would result in:

  • Loans becoming more expensive when the utilization rate is low.
  • Loans remaining costly when the utilization rate exceeds the optimal rate, but not excessively so.

To illustrate, here are the changes in the current pool rates:

And here’s how the interest rate adjustment would appear relative to the utilization rate:

This modification should lead to higher supply rates when utilization has not reached optimal levels and lower rates after surpassing the optimal rate.

However, this might result in higher utilization rates, potentially making it more challenging for liquidity providers to withdraw assets.

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Lowering Slope2 would reduce the steepness of interest rate increases as utilization rates rise, which is good for borrowers.

Consequently demand might increase, which is good for lenders.

6% seems a reasonable base rate for both sides of the equatiion.

Overall, and given the charts provided, I think the proposal is a good one as-is.

3 Likes

It would be great if we had data on other protocols to compare and contrast with on the graph you’ve shared. It’s still early days for V2 and trust and value for money is still being built.

I’m all for lowering slope 2, however the 3% increasing to 6% I’m slope 1 I’d need to see more data points for on how it compares against other lending protocols not just our own.

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Here is an example of Aave and it’s rates Borrow Interest Rate - Risk. I would put ADA as the most liquid and least possible volatile asset we have.

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Cheers :+1:

So for Ada I think I agree with the proposal as is and would be happy to vote for it.

Is it worth also thinking about stables (or at least some of them) being treated the same way as the Ada in this proposal? Not sure how some of the pegs are doing at the moment

2 Likes

I love it! The 6% base rate is great. The only thing I’d do differently is make the slope1 and optimal utilization rate bigger. Maybe 10 to 12 on Slope1 and 65 on optimal utilization rate. This would allow more of the pool to be accessed by borrowers and allow a higher rate for suppliers. Accessing more of the supply may be the most important. A borrower has to be really desperate to drive the utilization past 50% right now.

An even more optimal solution would be to use the V1 data to allow the parameters to be different for different pairs.

But, it’s a great proposal and it should increase the supplier rates.

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Could be interesting to see Butane synthetics get used this way?

The only proposal I’ll approve is lowballing.
8 ADA

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absolutly perfect we definatly need these fee system and also the locking of lenfi to earn and protect the protocol, vote… if token holders can earn protocol fees and liquidation fees along with interest at a balance rate this is massive incentive to also hold the lenfi token because people will have a massive reason… so mantas you the boss and if you realise its the same thing we all been talking about… so we see the problem and know the solution.

I recommend to use this spreadsheet to manipulate rates and different outcomes.

Also, if you have any suggestions - please share here.

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The spreadsheet is very helpful!

I think I like
Base Rate: 6%
RSlope1: 10%
RSlope2: 100%

This gives
Utilization: 45.00%
Old Borrow APR: 6.38%
New Borrow APR: 10.50%
Rate of Change: 64.71%

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This is great. Thanks.

I looked at various parameters in the spreadsheet with the goal of increasing the funds available between 10 and 15 percent (thinking mainly Lenfi/ada pool). I think that is what is missing in getting the lender rates higher

Our current settings (3% base, 45% util, 7.5 slope1, and 300 slope2) has a 1% range for loans with rates between 10 and 15. We hit 10% rate at 47% util and hit 15 at 48% util.

Using the Mantas suggested parameters (6 base, 45 u, 7.5 s1, and 100 S2) increases that range to 5% of the funds (hit 10 at 46 u and 15 at 51 u).

Using parameters like these (6 base, 65 u, 12 s1, and 100 S2) increases the range to 30%. We start 10% loans at 33% util and hit 15 at 66% util. That means if we get to the optimal utilization number (65%), then half of the supply would have been loaned at rates between 6 and 10 percent and half between 10 and 15. That’s going to give us a supplier rate of around 10%, which should be high enough to attract ADA deposits. This is a much better and sustainable way to attract deposits than giving out incentives.

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sweet so can we say this interest rate is now sorted and you can work on things like buyback mechanics… and safetypool because Approach for a Safety Module proposal is spot on along the lines of what you were also thinking all you would and tam would need to do is add whats missing and get it up and running

Would the rate change for existing borrowers as utilization changes? Similar to Aave? Or would the interest rate stay the same, set initially when the borrower opens the loan and is fixed for the term of the loan.

Only for the new loans. On both existing and new pools.

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Thanks. My fear is 6% base may still be too low, especially in this market. The ability to lend > borrow > withdraw means large users can consistently get access to the base rate.

They will never have access to the base rate with utilisation being at 0%.

Let me provide some examples.

For example if pool has a available supply of 100k and there is 10k loan - utilization rate would be 10k/110k = 9%. Then these scenarios could happen:

  • Just borrow 10k. UR: 20k/120k = 16.7%
  • Deposit 10k; then borrow 10k; UR: 20k/130k = 15.4%
  • Deposit 100k; then borrow 10k; UR: 20k/220k = 9%

With the update of Interest Rates we must make sure that someone would need to deploy reasonably large amount of capital to receive minimal gains.

We can achieve this by increasing Optimal utilization as well as having moderate slope1 and slope2 rates with high base interest rate.

3 Likes

Makes sense. I didn’t mean to state I don’t think this proposal helps. I 100% believe this proposal helps and I commend you for it. My personal opinion is the base rate may still be too low at 6. But this is a step in the right direction.

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Good aproach. Makes sense the adjustment and changes.