Since the launch of the V1 dApp on Mainnet, the number of users has been slowly but steadily increasing. However, the execution of the interest payment parameter has become a significant setback for user retention. In this regard, we would like to implement a minimum interest fee threshold for the dApp users.
The current implementation of the Liquidity Requests (Borrower Requests) follows a standard set of steps (Type of Native Token, Loan Size, Loan Term, and Interest) that users can customize. The protocol then “vests” the interest linearly according to the agreed-upon loan term (period).
While this feature is fair and efficient, it doesn’t have a minimum threshold. This creates a “gaming” vector where borrowers return a loan too quickly (e.g., in a day or two), paying an interest fee that’s close to 0%. A simple test where a borrower submits a request and returns the loan immediately shows the following:
- The borrower pays between ~0.75 and ~0.85 ₳ to create the request and repay the loan - A total of ~1.60 ₳.
- The lender pays about the same amount but does not profit or profits too little for providing their tokens as a loan.
Ultimately, supplying loans becomes largely unfeasible for participants who have encountered such an issue, thus disincentivizing them to continue using the dApp. As a result, the protocol fails to retain new users who have “burned” themselves before. Moreover, this trend diminishes confidence in the platform itself as a viable place for passive income.
Introducing a minimal interest threshold can solve the issue in three primary parameters:
- Deincentivize early loan returns and incentivise lenders to supply loans;
- It will provide minimal risk coverage for lenders;
- The protocol will actively encourage users to hold onto their loans for longer, reducing the quick take-and-return strategy.
The new interest vesting scheme should follow the same linear model. However, the borrower pays at least 20% of the interest, even if the loan is paid prior to 20% of maturation period. Interest equation (%) would be: (x + abs (x - a))/2 + a/2 , where a is the minimum interest to be paid (20%). . Here’s an example:
Loan request - 1,000 ₳
Loan term - 365 days (1 year)
Interest fee - 5% (50 ₳)
With the current linear scheme, returning the loan on the first day will result in ……~0.14…… ₳ of accrued interest - transaction fees (~1.5 ADA) = Total ~ -1.136 ADA
If the borrower returns the loan on the first day, a minimum interest threshold of 20% will result in an interest fee of 10 ₳ - transaction fees (~1.5 ADA) = Total of ~ +8.5 ADA.
The current interest fee vesting scheme is unfeasible for lenders in cases where borrowers return their loans immediately. This disincentivises users to actively participate in lending and borrowing, thus making the protocol unattractive to the masses. Introducing an interest threshold will guarantee a minimum profit for lenders and increase user retention on the platform.
Voting should be considered approved/disproved only if 10% of the circulating supply participates in the voting. The 10% of circulating supply is ~1.05M AADA.
Contributors: Dado, Mazen Khaddaj, neophyte