Special Update About the adjustment of XVS risk parameters

About the adjustment of XVS risk parameters

Recently, we began to adjust the risk parameters of multiple assets following the newly released risk framework. To ensure safety, adjusting some asset parameters will be divided into various steps, including XVS.

In VIP36, we have made the first adjustment to the risk parameters of XVS. Next, we will continue to adjust the parameters of XVS through proposals to achieve our expected goal: let borrowers return XVS as soon as possible.

Considering that some users did not understand the intention and impact of the XVS risk parameter adjustment, we prepared a more detailed explanation.

The purpose of this documentation is to explain the parameter setting, the outcome and the future changes for the interest rate mode of XVS. The Venus protocol wants to make it transparent to the community.

The Outcome of model change

Below are the snapshots of XVS borrow data before and after the model change

(As the data of July 9th)

(As the data of July 27th)

(Current data, Aug 10th)

It’s easy to see that, after the model change, the total supply decreased 401K XVS, the total borrow decreased 466K XVS, which is a 29.2% decrease for the borrowing amount. Since the community wants to ban the borrowing of XVS, this decrease is just what we want for the model upgrade.

As for the rate, the supply rate increased a little, which is also what we want. But the borrowing rate is still positive, and some people may have a question about it. In fact, it runs as predicted. The following section will discuss the parameter setting and explain why the borrowing rate is still positive.

As a whole, for VIP-36, our goal is to force the borrower to pay back XVS and not impact the supplier’s benefit. From the outcome, we can see the goal is achieved.

Model parameter setting and future changes

This chapter talks about how we determine the parameters and what changes will be imported soon.

For VIP-36, as we explained, since there will be no more borrowing for XVS, the interest rate model will keep using the linear rate (WhitePaper model) with a steeper slope as a=60%, b=0. On the date of July 27th, the utilization ratio is around 28%. The curve below shows that the predicted rates are 18.94% and 5.16% (Borrow & Supply). Also, we know the rewards at that time are 18.71% and 4.66%.

Therefore, immediately, the total interest rate will be:

Borrow Rate: -18.94% + 18.71% = -0.23%

Supply Rate: 5.16% + 4.66% = 9.82%

And our target utilization ratio for VIP-36 is 20%, so if borrowers still don’t pay back the XVS(the rewards/distribution apy will keep almost the same), the interest rate will be:

Borrow Rate: -13.38% + 18.71% = 5.33%

Supply Rate: 2.13% + 4.66% = 6.79%

From these calculations, we can easily see that changing a=10%, b=2% to a=60%, b=0 is to keep the supply rate and increase the borrowing cost.

But there is still a question: why is the current total borrowing rate for XVS as high as positive 14.59%? You may see that the distribution APY has changed from 18.71% to 27.41%, that’s the reason. Since borrowers pay back XVS, the total borrowing pool is smaller. Meanwhile, we keep the same distribution as 1500 XVS per day, and the borrowing rewards will increase. It’s evident that the following change will be related to “distribution” and “reserve factor.”

We know the change is a step-by-step process. From our roadmap, we just finished step 1. That’s why we just change the model parameter first.

Interest rate change roadmap

For the step 2, our plan is to raise a new VIP to further adjust as below:

  1. Shift the interest curve on XVS further up from (0, 60%) to (0, 120%)

  2. Increase reserve factor on XVS from 20% to 25%

  3. Decrease daily distribution on XVS from 1500 to 1000

After the change, the impacted XVS borrower is ~100, the supplier will have a similar rate, while the borrower will have a negative rate (based on data from 8/10) as below:

Supply Rate:

Current: 1.95%+5%=6.95%

After VIP: 3.66%+3.33%=6.99%

Borrow Rate:

Current: -12.78%+27.4%=14.61%

After VIP: -25.58%+18.26% = -7.32%

The venus protocol will keep decreasing the distribution and preserve the supply rate the same or even higher.

The current distribution is that the rewards will evenly go to the borrow and supply pool. Eventually, we will import a feature to control the proportion of distribution but it takes time to develop.

VIP-37 has now been launched based on the above description.