Gauntlet Moonbeam Recommendation - IR Curve Adjustment - 2023-12-20

Gauntlet IR Curve Recommendation for FRAX on Moonbeam

Simple Summary

A proposal to make adjustments to 2 parameters on FRAX’s IR curve:

FRAX IR Parameters Current Recommended
BASE 0 0
Kink 0.8 0.8
Multiplier 0.05 0.01
Jump Multiplier 2.5 0.01

IR Curve Analysis

Gauntlet recommends lowering the interest rate (IR) curve as a measure to alleviate the existing liquidity constraints in the FRAX liquidity pool. This proposed adjustment would result in a reduction of the Borrow Annual Percentage Yield (APY) to 1% when the pool is fully utilized at 100%.

As shown in the below chart, the recent increase in Borrow Rate APY has not significantly impacted full utilization of the FRAX liquidity pool, as both suppliers and borrowers have demonstrated counterproductive behavior in response to the elevated APY rates.

A decrease in Borrow APY would help prevent a worsened liquidity crunch, especially with FRAX borrowing being disabled at this time.

Next Steps

Gauntlet will put this recommendation up for the community to vote on via a governance proposal.

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Will the supply apy of frax drop from 86% into 0.8% ?
Lowering the APY will only result in lower liquidity. Prioritizing the protocol’s security over the safety of FRAX suppliers without considering their security is unacceptable. FRAX has already lost liquidity, or even permanently lost it. Reducing the supply APY will further harm the interests of the suppliers.

At this point I think this is making the best of a bad situation. Yes, it will reduce the Supply APY but it will also bring the Borrow APY down similarly. This will allow time for us to sort out the recovery of what we can from the Nomad Recovery Fund, as well as work towards paying down the ever-increasing bad debt positions.

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It would be helpful to me if you could provide definitions for what these parameters mean. Meaning what effect does BASE, Kink, Multiplier and Jump Multiplier have on the IR curve?

I’m such a sucker sometimes. I decided against taking all liquidity from the FRAX market to allow moonwell to find a solution, could have unwind a part of my position. Instead now its frax depositors who get hurt :confused:
If supply goes down:
a) nobody will supply
b) frax depositors who are borrowing anything will lose a ton of money

The only solution is, naturally, to move forward to solve the bad debt. I had NO IDEA that bad debt was still lingering around the protocol. Always found strange who borrowed so much frax, on telegram it was always “market dynamics” etc etc.

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I understand your concern. I do think you did the noble thing in not unwinding your position right away. This is definitely meant to be an interim solution and will buy us more time to sort out recovering funds from the Nomad Recovery Fund. This will help pay down some of the bad debt and get us back on our way to full recovery.

Perhaps we can think of a way to “thank” those who continue to provide liquidity to FRAX during this hard time.

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Hello Moonwell Community,

I’m reaching out to discuss our current situation with the FRAX liquidity crisis. I believe many of found ourselves unable to withdraw FRAX. From the data available, it seems we’re facing a liquidity shortage of about $2.5 million, with roughly $500,000 in accessible assets (please correct me if these figures have been updated).

I have some ideas, don’t kill me for it.

Maintain High Lending APY on FRAX: To incentivize the supply of new FRAX into the pool, I propose we keep the lending APY relatively high. This approach could incentivise new lenders. However this might dilute the value of well token.

Temporary Halt on FRAX Borrowing & Adjusting Collateral Factor: I saw temporarily stop of FRAX borrowing. Maybe also adjust the collateral factor to a conservative level, perhaps around 30%. This could prevent the accumulation of further bad debt while we navigate this crisis.

High-Risk, High-Reward Strategy Using Liquidated Assets: This is a bit controversial, I guess. We could use the liquidated assets to invest or speculate in the bull market, particularly focusing on big-cap cryptocurrencies. The idea is to create an ‘insurance’ fund from any profits, aimed at restoring liquidity. This could potentially allow lenders to unwind their positions with a small profit in about a year. - we would need to make clear guidance in who is eligable to do so

Creating a Dedicated Insurance Fund: Part of the total interest accrued could be redirected into an ‘insurance fund’. This fund would serve as a buffer for future liquidity crises, managed transparently and with community oversight.

just some thoughts.

I hope we can resolve this problem and grow the project and make it more resistant for future mishaps.


Hey @Qhuman, thanks for joining the Gov Forum and for the well thought out reply!

  • Maintain High APY: MIP-13 will actually lower Supply/Borrow APY. MIP-12 recently passed and increased WELL/GLMR emissions for supplying FRAX. Additional WELL rewards could be allocated to the market.
  • Temporary Halt on Borrowing: The only caveat I’ll mention is that by lowering collateral factor, you run the risk of liquidating users. This is why you will many times see risk focused contributors like Gauntlet lower CF’s in a more phased approach (to give people sufficient time to adjust their positions).
  • Insurance Fund: This sounds very similar to the existing protocol reserves, which capture the spread between Supply and Borrow APY and serve as a liquidity buffer (reserves contribute to available liquidity in a market and can be withdrawn by users).
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I’m confused why would lowering the borrowing APR on FRAX improve liquidity? Wouldn’t raising it incentives borrowers to repay and reduce FRAX pool utilization rate?

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Lower the borrow and supply APR on FRAX dry up the liquidty.
We should lower the borrow APR and higher supply the APR to attract the suppiers.
The most important thing is people have no faith on the pool or protocol, the 0 liqudity shows that. They don’t think the team can resolve that.
Don’t forget not only frax has bad debts, dot, glmr also have that problem.

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Hey @kololo,

Now that the interest curve has been flattened, massively slowing down the accumulation of bad debt, supply side rewards could be increased further. MIP-12 increased WELL/GLMR rewards, but in theory they could be increased further. It may not serve as a way to incentivize suppliers (they were much higher recently), but that would at least provide suppliers with some additional relief while utilization remains high.

As Gauntlet is the Moonwell protocols primary risk focused contributor, let’s please await their next update / proposed steps.

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