Interest Rate Model Update
This week we are changing our interest rate model to address the current liquidity crunch problem, where some liquidity pools have low to no liquidity for borrowing and withdrawing. We will increase the growth rate of borrowing costs as we approach higher utilization rates.
This new interest rate model will go into effect Friday, August 28th at 1pm UTC+8 for COMP, BAL, YFI, LINK, CREAM, LEND, CRV. Also, we will reduce the reserve factor from 50% to 40% for these tokens to incentivize suppliers, giving suppliers higher interest rates. Interest Rate Models for the other tokens will remain unchanged.
Below is a graphical illustration of the current interest rate model for COMP, BAL, YFI, LINK, CREAM, LEND, CRV.
The current interest rate model that we have deployed is mostly linear. Coupled with strong incentives in the form of high yield returns, annualized borrowing rates in the high-30% range were not enough to pressure borrowers to return funds in times of high utilization. This led to liquidity pools sitting near empty, creating a liquidity crunch where borrowers do not have enough to borrow, and suppliers cannot fully withdraw their funds.
The new interest rate model that we are deploying on August 28th is similar to the first model, but increases faster starting at 80% utilization. Nearing 100% utilization, borrow rates approaches 65% while lending rates approaches 35%. We will increase this rate of change even faster, if this implementation does not solve the liquidity crunch problem.
Impact to Suppliers
Suppliers on C.R.E.A.M. will receive higher interest rates, especially at high utilization (80%+). With increased incentives to suppliers, we expect to see more liquidity in these pools, reducing the chance that suppliers cannot fully withdraw their funds at any given time.
Impact to Borrowers
Borrowers on C.R.E.A.M. will pay higher interest rates, especially at high utilization (80%+). With increased interest rates, we expect to see more liquidity in these pools, increasing the chance that borrowers have access to funds when they want to borrow.
We will continue to make adjustments to evolve C.R.E.A.M. to better serve our users. We will review the impact of this change and determine if further changes to the interest rate model needs to be made.
Jeffrey Huang, Founder
Crypto Rules Everything Around Me, C.R.E.A.M.