ADA Market Interest Rate Parameter Updates

Temperature Check
1

Proposal Overview
This proposal seeks to implement 5 updates to the ADA market interest rate curve:

  1. Decrease the steepness of the pre-kinkPoint slope 1 (decrease utilMultiplier from 40% to 3.5%).
  2. Move the ADA market kinkPoint from 65% to 90% to enable more ADA to be borrowed at a lower interest rate.
  3. Update the baseRate from 3.0% to 3.75%.
  4. ADA market borrow cap updated from 80% to 95%.
  5. Update of the baseRate every 18 epochs to reflect the latest Cardano staking yield.

Market Update Reasoning

  1. Boosting utilization in the ADA market must begin with implementing a flat curve that enables more capital to be borrowed at a lower rate and more predictable interest rate change. Significant decrease to the ADA market’s utilMultiplier is required.

  2. Increasing the kinkPoint from 65% to 90% enables more ADA to be borrowed at the lowest possible cost with a more gradual increase in interest rate in line with the market demand.

  3. Increasing the baseRate from 3% to 3.75% ensures ADA suppliers always earn a minimum of 3% real yield (ADA staking rewards + repaid interest).

  4. Updating the ADA market borrow cap to 95% gives ADA suppliers a 5% margin where the 2nd curve after the kinkPoint goes into effect where the Supply APY is it’s maximum amount.

  5. Updating the baseRate every 18 epochs enables the protocol to lend ADA at the most competitive interest rate on the market while ensuring suppliers earn at a minimum the current ADA staking yield.

Current and proposed new interest rate models:

1600×574 154 KB

With ~74M ADA deposits the Liqwid ADA market is the largest ADA liquidity pool in all of Cardano DeFi. Balancing the demand side of the ADA market to provide a competitive and low risk yield to ADA suppliers is now the focus. Following our core team’s internal analysis plus recommendations from Liqwid community members and Optim DAO members we are now proposing these changes to make Liqwid the dominant venue to borrow ADA for Cardano DeFi users and tradFi financial institutions equally.

Risk Considerations
The main consideration with this change is risk to liquidity providers as utilization in the ADA market grows. This risk is mitigated to an extent by supply and borrow caps applied to the ADA market. Supply caps determine how much of each asset may be used to borrow ADA based on the assets onchain liquidity. Borrow caps determines the maximum percentage of the market allowed to be borrowed from the protocol.

This risk is of course also representing the profit ADA lenders earn by lending at higher borrow rates to compensate them for this liquidity risk.

Specifications
Liqwid Labs developers have completed the necessary testing and technical requirements needed to implement the proposed changes to the ADA market.

Conclusion
Liqwid core team supports these updates to the ADA market’s interest rate curve to stimulate increased utilization.

Do you support this proposal to update the ADA Market interest rate curve?

  • Yes, I support this proposal.
  • No, I do not support this proposal.
0 voters
2 Likes
2

This, coupled with point #5, if the base rate can be created to always be the minimum ADA staking yield(x) + additional %, Liqwid would be the go-to spot for smart contract staking. With marketing that Liqwid ADA staking earns more than the standard staking, this can create a continual cycle of more depth and liquidity. This is great, especially as staking yield continues to decrease.

This will put an initial 16M+ ADA into ‘hyperlending’ that will be the amount that is available day 1 this proposal passes for borrows to tap into and not surpass today’s current rates.