New Interest Curve Mechanism
Dear Poolsiders 🏊♂️,
Clearpool is excited to announce a major update to its innovative decentralized liquidity protocol — a new interest rate mechanism that will significantly enhance how institutions and investors borrow and lend digital assets.
Developed over many months, the new interest rate model has been built specifically for Clearpool’s permissionless pools. It is based on a sophisticated first-of-its-kind formula designed to encourage borrowers to optimally utilize liquidity in their pools whilst more accurately compensating lenders with attractive risk-adjusted returns.
Going forward, we will also introduce a robust staking framework that will govern Clearpool borrower interest rates and ensure their alignment with constantly changing market conditions.
“The development of Clearpool’s new interest rate model is a milestone. It will bring further improvements in capital efficiency, price discovery and transparency as well as further expand opportunities for borrowers and lenders across decentralized finance,“ said Robert Alcorn, CEO of Clearpool.
The Story Behind the New Curve
An updated interest rate curve has been in the Clearpool roadmap since day one and represents one of the most important upgrades launched to date.
From the beginning, it was our intention to develop an interest rate model that would be adaptable for different borrower ratings, giving higher-rated borrowers the ability to borrow at more attractive rates and vice versa. Further, there was a requirement to ensure that a new interest rate model would also address the optimization of liquidity utilization of each borrower pool.
Creating well-functioning markets is a core goal behind Clearpool’s product development; the team also aimed to build a new interest rate model that would be derived from, and move with, the market. This led us to rethink our plans for staking and governance.
New Interest Rate Mechanism & Curve
The formula for the new interest rate model:
For additional details about the formula and other evaluated approaches, you can read the technical paper here.
Despite the complexity of the formula, the model can be explained in simplistic terms:
- The curve has its lowest interest rate (Ym) at utilization (Xm) in order to achieve optimal utilization and capital efficiency
- The curve discourages utilization in lower and extreme high ranges
- The borrow APR steadily decreases with utilization from X0 to Xm. This compensates lenders who maintain funds within the pool with a more favorable interest rate when the borrower utilization rate is below optimal
- Concurrently the curve increases sharply from Xm to X1, discouraging high utilization. This design reinforces the exit liquidity available for lenders even when utilization is optimal
- During periods of volatility where liquidity withdrawal rates are higher, utilization/interest rates will peak, incentivising borrowers to reduce utilization in order to avoid higher interest rates. Higher interest rates may also attract new lenders to the pool
Clearpool’s permissionless pools are decentralized micro-markets driven by the market forces of supply and demand. It, therefore, follows that the interest rate mechanism that is intrinsic to each of these pools is also derived from the market.
Today, we are pleased to announce the new CPOOL native delegated staking model that will sync the new interest rate curve with the forces of the market.
CPOOL holders will soon be able to delegate their CPOOL voting power to Clearpool Oracles who will perform an important function within the Clearpool system.
Clearpool Oracles will input the four parameters that, within the interest rate formula, will form the shape of the curve. These are:
Y0 — Interest rate at 0% utilization
Ym — Interest rate at Xm
xm — Percent of utilization at which the lowest borrowing rate exists
Y1 — Interest rate at 100% utilization
The process for delegated staking is explained at a high-level below:
- Clearpool Oracles (CO) will input the four parameters on a daily basis
- At the end of each epoch (1 week) the distribution of all CO inputs will be used to determine the shape of the curve for the next epoch
- CO’s whose inputs fall within a certain range of the distribution median will be rewarded with a proportionate share of the CPOOL emissions for that epoch
- CPOOL holders can stake CPOOL and delegate their voting power to a CO in order to share CPOOL emissions
- CO’s whose inputs fall outside of the median range will not earn rewards for that epoch
- CO’s will charge a fee to all delegators
- Delegated CPOOL will earn a proportionate share of emissions based on the percentage of all CPOOL delegated to a CO and based on the time within the epoch that CPOOL was staked/delegated
This model ensures that the interest rate curve reflects market dynamics as Clearpool Oracles are incentivized to provide fair and accurate inputs in order to attract more delegates and earn greater fees. Therefore, delegating is also a very important action which secures the pricing model by further incentivizing CO’s.
Clearpool is working with a number of partners who will become the genesis Clearpool Oracles, however, once this model is launched later in Q3, anyone will be able to become a CO through self staking of CPOOL.
This distributed model is the first step in Clearpool’s wider plans for on-chain decentralized governance.
More details on delegated staking and governance are to be released soon.
This mechanism allows CPOOL holders to participate in a very important element of the Clearpool economic model and earn a yield on their CPOOL holdings through a real utility. This additional utility significantly enhances the CPOOL economy:
- Borrowers stake CPOOL to open a permissionless pool
- Lenders earn CPOOL by providing liquidity to a borrower pool
- Clearpool Oracles stake CPOOL
- CPOOL holders delegate CPOOL voting power to Clearpool Oracles through staking
- Protocol revenue is used to buyback CPOOL on the open market
- A percentage of buybacks will be burned, with the remainder deposited into the rewards pool
Additional token utility will be introduced with later product releases and enhancements. More details to follow.
- Clearpool is introducing a new interest rate mechanism that will encourage optimal borrower utilization and enhance capital efficiency & supply interest rates
- The new curve will be derived from and move with the market, with a distributed network of Oracles providing the parameters which will shape the curve
- CPOOL holders will be able to participate in delegated staking to earn a yield on CPOOL holdings and help secure the curve pricing mechanism
- Delegated staking enhances the utility of the CPOOL token
We hope that our community of Poolsiders are as excited as we are for this new product enhancement and the additional features and utility it will bring to the CPOOL economy.
As always, we thank you for your support as we continue to build and deliver a first-in-class protocol driven by the vision of its founding team, the passion of its community, and the real needs of its users.
We keep building, onwards and upwards!
The Clearpool Team