Experiment with the lending curves

As Sovryn grows and the market evolves, it is important that we regulary revisit our lending rates and ask ourselves if these settings are (still) working in our favor or if we should rather change them. To which extent do the rates drive borrowing and lending interest and which of the sides do we need to incentivize more strongly?

At this moment, new XUSD borrowers pay a rate of 15.81% and lenders receive 10.21% plus liquidity mining rewards in SOV. We’re looking at a utilization rate of roughly 75%. This means, 75% of all supplied XUSD are currently borrowed and generating interest.

Question we should answer are:

  • What is the optimum utilization rate? The higher the rate, the higher the yield for the lenders, but if gets too high, it results in a liquidity bottleneck, limiting the opening of new positions and preventing lenders to withdraw their funds from the pool.
  • What is required to incentive lending?
  • How high can the interest be and still be considered acceptable?

While we do not have the capacities in-house to perform a detailed study, we could orientate ourselves towards other succesful protocols, such as Aave. @Ponjinge performed an analysis of the Aave lending rates:

Aave is using much lower rates than we do at the moment. If we focus on the stable coin pools, Aave is using a base rate of 0 %, a multiplier of 4%, a target utilization rate of 80-90% and afterwards a multiplier of 60-100%. The formula can be looked up on the document shared above. Our XUSD pool is using a base rate of 6%, a multiplier of 15%, a target utilization rate of 75% and scale up to 150% afterwards.

If we would have been using the Aave curve until now, the current borrowing rate would be 3% instead of 15.81%. Only if the desired utilization rate is exceeded, the rate would increase drastically. Of course, this would result in lower yield for the lenders.

What are your thoughts on interest rates? What do you think is the optimum?


I think it is hard to set a meaningful interest rate policy right now as the reward incentives create market distortions, both on the lending and borrowing side, as I’m sure some of the borrowing is being recycled back into the LP pools. When Zero goes live, this will also create some more impacts as many users will be able to borrow from themselves without paying the lending spread. I’m not opposed to experimenting with the rates now, I just don’t know if you’ll get any meaningful learnings though until such time as Zero has stabilized and incentives have been tapered.

Having said that, I would support something closer to Aave’s.

I’ve been both lending and borrowing and will look at this issue from both sides as a user (for the XUSD lending pool):

Lending perspective:
The SOV reward for lenders in the XUSD lending pool is the elephant in the room. This defines the revenue for lenders and makes the actual interest rate for lending mostly negligible. Every decision with regard to rates needs to factor in whether SOV rewards will continue or not. I’d personally not lend any money below an interest rate of 10-15% as the rates are very competitive in DeFi and i prefer just hodling btc. With SOV rewards this is definitely a different story.
If the rewards continue in their current form (or reduced by a bit) i think it would be fine to get closer to Aave’s curve. If the rewards disappear, I’d prefer to stay with the current rates and definitely not lower them.

Borrowing Perspective:
When i borrow i use it mostly for margin trades. When leverage trading anywhere else, there are funding rates. Sovryn is different here and it’s very good the way it is. In this comparison, the borrowing rates for margin trading are very competitive on Sovryn, especially with the trading rewards that should be touted a lot more. I don’t feel that for borrowing, lower rates are really needed.

Conclusion: SOV rewards are required to incentivize lending and should continue (maybe tapered a bit). Rates could go down a bit, but should stay relatively high when compared to Aave.

To answer the original post, “What is the optimum utilization rate?”
Whatever benefits the protocol and SOV stakers the most.
If lower borrowing rates is good for adoption and SOV stakers, lower the rates.
I can’t imagine too many lenders are fretting over 10 or 15% when the incentive program is so large.
Will limit orders for both borrowers and lenders eventually be available?

@adamrncf what are limit orders for lenders/borrowers?

Rather than “here are the rates, take it or leave it”
allow borrowers to bid on the interest rate they are willing to pay for example
10% for 1 month, 9% for 1 month and lenders to offer similarly.

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In a current topic about the lending services; perhaps this question I raised in another topic fits as well: has there been a cost/benefit analysis of not offering Sov itself for borrowing and lending?