Deferred Fees, Not Origination Fees
“Origination fee” is an inaccurate term and should be changed:
- The fee is paid at the end, not at the beginning
- Unlike bank origination fees, this fee does not create a compounding burden to to interest payments, not does it need to be paid off as part of interest installments
- As long as the LoC is maintained, the fee does not need to be paid off
- Instead, the fee is added to the total debt burden of the LoC and is only paid if and when the LoC debt is paid.
- I think we should change the term ‘origination fee’ to the more accurate ‘deferred fee’
From a “marketing” perspective, I think ‘Deferred fee’ is not only more accurate but also more palatable and attractive. Buy now, pay later is a very well-worn concept.
Changes to the Deferred Fee
The interest rates in the market change frequently. Over the last year, we have gone from a 0% interest rate environment to one with much higher rate. The upshot of this is that borrowers willingness to pay has increased substantially.
As of writing, the market is seeing Bitcoin-backed borrowing dollar borrowing rates as high as 12-14%. Under these circumstances, 0% loans can see the Zero flooded with borrowers creating an ever growing supply of dollars. This supply needs to be matched with demand for dollars by DLLR hodllrs. Additionally, by providing borrowing at rates far below the market rate, the Sovryn protocol is leaving money on the table.
This situation calls for the ability to increase the Deferred fee to match supply with demand. The correct fee now may be as high as 12%, although it can be kept lower. Increasing the fee would have several impacts:
- It would reduce Zero borrowing demand and dollar supply (although possibly not by that much)
- It would increase protocol revenue and SOV-staker returns (possibly by a lot)
- It would redirect some of the borrowing activity to the lending pool, with its variable, rather than fixed, rates. This would generate demand for DLLR by creating an interest bearing DLLR product for lenders. It would also increase protocol revenue on an on-ongoing basis.
It’s important to note that changes to the Deferred fee would not impact existing lines of credit.
As we gear up to launch Dapp 2.0 and ungate Zero borrowing, these changes would, I believe:
- Help match DLLR supply and demand
- Protect LoCs from redemption as well as supporting the peg
- Create an interest bearing DLLR savings product
- Improve DLLR liquidity
- Increase protocol revenue and SOV-staker yield
To my mind, increasing the deferred fee is a no brainer. The only question is by how much? Could see arguments for as much as 12%. My initial intuition is to increase it to 4.9%. I am very interested in your thoughts.