Interest rates for lending have traditionally been based on the risk-free rate, typically represented by the 3-Month US Treasury Bill, to which a premium is added to account for credit risk. The Risk-Free Rate is typically equivalent to the interest paid on a 3-month government Treasury Bill, considered one of the safest investments available to investors.
Historically, the 3M Treasury Bill rate has fluctuated, remaining around 2% for several decades, but dropping to 0% after 2008. Currently, it stands well above 5% (5.38% as of July 28, 2023).
This new normal reflects a world that has become more volatile, uncertain, and complex for investors, leading to their demand for higher interest rates.
Every lending protocol relies on stablecoins as the lifeblood of any DeFi lending market. Users borrow stablecoins against collateral within these protocols.
Currently, DJED and iUSD have a medium to high utilization rate, with utilization rates of 72.27% and 43% respectively, showing a kink at 75% and 65%. Despite offering significant incentives like LQ rewards, which can reach up to 50% APR for suppliers, these two stablecoins have not seen a significant surge in supply.
Today, DJED and iUSD are created based on different minting mechanisms, limiting the possibility of a rapid increase in stablecoin supply in the short-term.
Therefore, with the addition of new tokens as collateral (AGIX being the first), it is expected that the demand for borrowing stablecoins will increase, further pushing the utilization rate.
To address the growing demand and align with the evolving rise in financing costs observed in traditional markets, we are proposing an adjustment to the base rate of stablecoins, raising it from 2% to 4%. The Base Rate corresponds to the “risk-free rate” utilized in the Liqwid interest rate model.
Our expectation is that this increase will incentivize a higher number of suppliers to offer stablecoins on Liqwid, thereby alleviating the pressure on the stablecoin market, especially after the introduction of additional tokens as collateral.
Governance vote on the Interest model:
DJED: Change of the base rate from 2% to 5%
iUSD: Change of the base rate from 2% to 5%
Do you support the creation of $AGIX market on Liqwid?
[Edit 29.073.2023: 5% as base rate instead of 4% as previously meant]
Additional information on the interest rate model calculation
Additional information about the effective rates with a 5% base rate for DJED and iUSD