Chaos Labs - Stablecoin IR Updates - 04/04/24

Summary

A proposal to increase stablecoin Interest Rate parameters across all Venus stablecoin markets.

Analysis

Amid our routine monitoring of the interest rates on Venus, we continue to observe persistent volatility in borrow rates. This volatility is largely driven by the upward trend in the market and various speculative investment strategies. The increased market activity has led to a substantial demand for external leverage, resulting in significant inflows of supplied capital and a convergence of rates at considerably higher levels.

To address this ongoing challenge, we propose a more assertive increase in the multiplier parameter. This adjustment is intended to stabilize borrows below the kink point, operating under the assumption that rates will eventually revert to a longer-term mean.

Stablecoin Total Supply and Borrow:

From January 3 to April 3, we observed the following increases in supply and borrowing across USDC, USDT, and DAI:

Asset Total Supply (M) - Jan 3 Total Supply (M) - Apr 3 Supply Change (M) Supply Change (%) Total Borrow (M) - Jan 3 Total Borrow (M) - Apr 3 Borrow Change (M) Borrow Change (%)
USDT 221.7 283.0 61.3 27.64% 179.2 237.8 58.6 32.68%
USDC 111.8 120.6 8.8 7.88% 87.2 104.1 16.9 19.39%
DAI 3.7 3.9 0.2 5.41% 3.0 3.4 0.4 13.33%
Total 337.2 407.5 70.3 20.82% 269.4 345.3 75.9 28.17%

This represents an overall $70.3M increase (20.82%) in supply across USDC, USDT, and DAI on Venus, and a $75.9M increase (28.17%) in borrows. This points to substantial demand for leverage and appealing supply rates.

Interest Rate Analysis

Over the past few months, borrow rates for stablecoins have consistently remained above the kink rate. This trend has been fueled by an upward market trajectory driven by various speculative investment strategies. As a result, the market-priced rates for stablecoins have soared to unprecedented levels, accompanied by substantial deposit inflows.

The graph below depicts the borrow rates observed over the last three months, along with the calculated 7-day Moving Average. Analysis of the data reveals that rates rarely aligned with the parameterized rate at the kink. This lack of alignment has contributed to increased rate volatility, failing to stabilize rates around the kink for several weeks.

Stablecoin APY Last 90 Days (7D MA)-3

This discrepancy indicates a pressing need to adjust rates upwards. Throughout the period, borrow rates consistently exceeded optimal levels, underscoring the necessity to recalibrate rates to reflect market conditions better and align them more closely with the kink benchmark.

Computing the arithmetic mean over varying timeframes for the stablecoins mentioned above, we observe a significant recent uptick, accompanied by sustained rates priced well above the kink rate.

Arithmetic Mean USDC USDT DAI
Last 90 Days 17.30% 15.68% 15.09%
Last 60 Days 19.28% 18.19% 17.85%
Last 30 Days 23.03% 20.81% 21.43%
Last 14 Days 18.44% 16.24% 14.75%

Time Above Kink

Upon thorough analysis of the percentage of time when utilization exceeded the kink and considering the aggregate utilization rate across different timeframes, it becomes evident that the current multiplier value has not effectively stabilized utilization at or below the kink. This outcome can be attributed to evolving market dynamics, particularly the recent surge in crypto asset prices.

By plotting various theoretically higher annualized multiplier values as scalar factors to account for historical “Time Above Kink” relative to the rolling interest rate, we can assess how “Time Above Kink” diminishes with increasing multiplier based on the market-priced interest rate. The surge in current interest rates over the last 7-14 days is noticeable, indicating minimal decay as the multiplier increases with recent rates. This is in contrast to a more pronounced decay observed over longer timeframes.

Screenshot 2024-03-24 at 16.31.45

Specification:

We recommend adjusting the multiplier in the BNB Chain Core Pool and Stablecoins Pool from 6.875% annualized (5.5% APR at the kink) to 15% (12% APR at the kink). Additionally, we propose aligning the stablecoin market parameters on the Ethereum deployment with those on the BNB Chain and opBNB markets. Concurrently, we also suggest increasing the interest rate for stablecoins supplied in more risk-averse pools, including the GameFi and DeFi Pools, from 12.5% annualized multiplier (10% at the kink) to 18.125% (14.5% at the kink). This increase aims to achieve a more predictable and stable borrowing rate with an equilibrium utilization below the kink point.

Despite the recent trend of rates rising and oscillating above the kink point, this adjustment assumes that current rates will regress to a longer-term mean, as seen through the hovering borrow rate a few months ago and a significant reduction in “Time Above Kink”. This approach allows for a more gradual adjustment, enabling us to thoroughly assess the situation going forward and make informed decisions based on supplier and borrower activity.

We recommend that these increases be implemented in three tranches — with weekly increases over three weeks. Throughout this process, Chaos Labs will monitor activity and adjust recommendations accordingly.

Asset Chain Pool Multiplier (Annualized) 1st Tranch - Recommended Multiplier (Annualized) 2nd Tranch - Recommended Multiplier (Annualized) 3rd Tranch - Recommended Multiplier (Annualized) Jump Multiplier (Annualized) Recommended Jump Multiplier (Annualized)
USDT Binance Core Pool .06875 (5.5% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) No Change
USDC Binance Core Pool .06875 (5.5% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) No Change
DAI Binance Core Pool .06875 (5.5% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) No Change
FDUSD Binance Core Pool .06875 (5.5% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) No Change
USDT Binance Stablecoins .06875 (5.5% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) No Change
USDT Binance GameFi .125 (10% APR at kink) .15 (12% APR at kink) .175 (14% APR at kink) .18125 (14.5% APR at kink) No Change
USDT Binance DeFi .125 (10% APR at kink) .15 (12% APR at kink) .175 (14% APR at kink) .18125 (14.5% APR at kink) No Change
TUSD Binance Core Pool .06875 (5.5% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) No Change
FDUSD opBNB Core Pool .075 (6% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) No Change
USDT opBNB Core Pool .075 (6% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) No Change
USDC Ethereum Core Pool .07 (5.6% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) 80% 250%
USDT Ethereum Core Pool .07 (5.6% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) 80% 250%
crvUSD Ethereum Core Pool .07 (5.6% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) 80% 250%
crvUSD Ethereum Curve .07 (5.6% APR at kink) .1 (8% APR at kink) .125 (10% APR at kink) .15 (12% APR at kink) 80% 250%
2 Likes

It’s a good proposal and I hope team will be implemented as soon as possible.

I fully support the proposal

Venus stablecoins liquidity are small… mostly increases at binance events… raising rates will only keep whales away from borrow at Venus…

2 Likes

We recommend moving forward with the implementaion of tranche 2 for all assets, excluding USDC and USDT on the BNB core pool.

Reviewing the rates following the multiplier increase on April 11th, the borrow APYs for USDC and USDT on the BNB core pool did converge to the updated optimal rate of 8%, in line with the overall decrease in market-priced interest rates. However, USDC and USDT on Ethereum, as well as DAI on Binance, did not converge.

As a result, we recommend waiting a few days before adjusting the rates for USDC and USDT on BNB core pool to adequately assess the impact over a longer time frame, while proceeding with updates for the others today.

2 Likes

Following the coming decrease in DSR from 13% to 10%, which could impact the effective borrow rates in the broader market and on Venus, we recommend no further changes to IR parameters at this time.

We will continue to closely monitor both market-wide and protocol-specific borrow rates and will provide updated recommendations as necessary.