Summary: Proposal to change the function used in calculating interest rates for borrowing.
Abstract: This proposal suggests changing the current function used to calculate borrowing interest rates from
Borrowing Interest = m * utilization + b to a new function that provides more control over higher ranges and allows for better targeting of optimal rates.
Overview: The proposed new function for calculating borrowing interest is as follows:
Borrowing Interest = y = A/C*log2(1 + (utilization*(2^C))/B) from 0 to B and
Borrowing Interest = A-1 + 2 ^ ((utilization - B)*D) from B to 100. This new function would be computationally efficient since it uses base 2 and would provide more control over higher ranges with a maximum value controlled by changing the D variable. Additionally, it would allow for better targeting of optimal rates with the B variable and provide choices for steepening with the C variable.
Given that, I would recommend B (target utilization rate) = 85 or 90 for all coins,
A (target interest) =
- 5 for BTCB
- 8 for Stable Coins
- 10-15 for ETH
- 20 for other coins
I would also like to recommend C (steepening of the log function) =
- 4 for Big vaults
- 6 to less stable vaults
Lastly, I would like to recommend D (reduction factor for the exponential function) =
- 0.5 for bigger vaults
- 0.7 to 0.8 to smaller/volatile vaults
Motivation: The motivation behind this proposal is to improve the control and targeting of interest rates for borrowing within Alpaca Finance. By implementing this new function, we can better manage higher ranges and target optimal rates more effectively.
Based on this proposal to change the function used in calculating interest rates for borrowing within Alpaca Finance and your recommendations for the values of A, B, C and D for different coins and vaults, using this new function would enable you to track and analyze historical data on borrowing interest rates. This data could provide valuable insights into the most commonly used interest rates and help you optimize the value of A over time.
By monitoring trends and patterns in borrowing interest rates, you can make informed decisions about adjusting the value of A to better meet the needs of borrowers and lenders within Alpaca Finance. This could help improve the control and targeting of interest rates for borrowing and ensure that they remain competitive and effective over time.
In addition to optimizing the value of A to improve the control and targeting of interest rates for borrowing within Alpaca Finance, it is also important to avoid underutilizing lending buckets. Underutilization can occur when there is an excess of funds available for lending but not enough demand from borrowers. (Like BTCB)
One way to address this issue is to monitor utilization rates and adjust interest rates accordingly. If utilization rates are consistently low, it may be necessary to lower interest rates in order to attract more borrowers and increase utilization.
References: Two examples using this new function are provided below:
Example 1: A = 20, B = 90, C = 4, D = 0.5
Example 2: A = 20, B = 90, C = 10, D = 0.75