Part 1: Wing’s Reserve Factor Standardization Model
The second article in Wing’s Risk Model series outlining Wing’s Reserve Factor Standardization Model.
If you missed the first article in this series, Introduction: Wing’s Risk Asset Model, you can read it here.
A “Reserve Factor” is a fee on the interest paid by borrowers, which is added to Wing’s reserves. Currently, the Reserve Factor for all the assets in the Wing Flash Pool is 15%.
Wing’s reserves are used to support ecosystem development, reward contributors, stabilize the market, and lower risks. Currently, in accordance with WIP-04, 50% of the reserves are being used to buy back and burn WING each month until 1 million WING have been bought back and burnt.
The Reserve Factor affects the Wing project in three ways:
- The Reserve Factor acts as the risk premium of Wing’s borrowing assets. Wing can grow its reserves faster from assets assigned to a higher Reserve Factor. Since the reserves have the effect of lowering risks, the Reserve Factor should be set higher for assets with greater volatility and higher risks, and lower for assets with less volatility and lower risks;
- The Reserve Factor is an integral part of the interest rate model. A high Reserve Factor reduces the interest earned by users who supply assets, thereby de-incentivizing users from supplying assets. A low Reserve Factor increases the interest that users earn from supplying assets, which in turn encourages users to supply assets and grow liquidity;
- The Reserve Factor is important in the business model of the Wing project. The level of the Reserve Factor determines the growth of Wing’s reserves, which in turn determines the profitability of the Wing project and whether it can continue growing. Sufficient reserves allow Wing to better grow the project and give back to WING holders. However, an excessively high Reserve Factor will make the project unattractive. Thus, it is necessary to balance the relationship between short-term income and long-term development.
Therefore, the Reserve Factor should not be set or changed without careful consideration. An improper Reserve Factor may negatively impact the growth of the Wing project. Based on the above, we have established a standardized model of Wing’s Reserve Factor. First, the model utilizes Wing’s Assets Risk Model to determine the volatility and risks of each asset. Second, considering that Wing is currently in a hyper-growth phase, profit is not the primary goal, so the overall Reserve Factor should be set low to ensure competitiveness.
Calculated by Wing’s Reserve Factor Standardization Model, the Reserve Factor of each asset should be as follows:
We invite our community to discuss, propose and vote on whether to adjust the Reserve Factor accordingly.
