I would like to propose adding WELL incentives to borrow positions of stable assets to stay competitive with other protocols.
Currently, on Moonwell Artemis, there are WELL (and GLMR) incentives only on the supply side, and are very competitive for supplying. However, both xcUSDT and USDC have borrowing rates of around 10% APR, which makes the loans even less interesting than bank loans (which I remind you are not over-collateralized and thus should not be lower than Moonwell loans). Other lending protocols (e.g. Compound Finance, Tectonic and others) always provide similar incentives on both, supply and borrowing. Moonwell should do the same.
To balance out a potential higher emission, I would propose to make “reward recycling” impossible, meaning supplying and borrowing the same asset (which does not provide true protocol usage and increases bad liquidation risk).
Hey @BusinessLion. In my opinion, implementing borrow side rewards won’t have much benefit at this point in time. The Moonbeam deployment already has the highest borrow usage among all Moonwell deployments (as indicated on Gauntlet’s Dashboard), with the mentioned assets (xcUSDT and USDC.wh) being utilized at around 80%. By prioritizing rewards on the supply side, we can attract new liquidity, which will ultimately decrease utilization and borrow rates.
The supply and borrow rates always fluctuate based on market utilization. As of now, the xcUSDT borrow rate has dropped to 5% APY from your previously quoted 10% APY.
When deciding to incentivize suppliers and borrowers, we would have to consider the pool dynamics for xcUSDT and USDC.wh on Moonbeam. Currently, utilization for USDC.wh and xcUSDT has been trending above 80% since mid-October, signaling strong demand from borrowers for these stablecoins:
Borrower inelasticity to the higher borrow rate has caused the higher borrow APR while the volatile nature of the IR curve post the kink has created borrower rates as high as 36% on Nov 8th. From the chart above, you can see that xcUSDT utilization has recently experienced a drop with a large outflow of borrows.
The borrower inelasticity can be attributed to recursive lending strategies within the protocol. The rewards associated with USDC.wh and xcUSDT have given rise to a highly profitable recursive lending strategy. As illustrated below, USDC.wh boasts a supply APY of 14.1% while the Borrow APY stands at 9.6%. If a user were to hypothetically initiate a position and subsequently replenish their borrowed funds at the 64% collateral factor, it would not become unprofitable until the borrow APY approached approximately 14%, assuming all other factors remained constant.
Incentivizing borrowing may alleviate the elevated APRs for USDC.wh or xcUSDT, but it represents a short-term solution that could ultimately result in continued borrowing due to a discounted market borrow rate. This increased borrowing activity would increase utilization and potentially introduce full utilization risks to the liquidity pools.
Another noteworthy aspect is the recent upward trend in stablecoin borrowing costs within the broader DeFi landscape. Lending protocols across various blockchain ecosystems are currently offering borrow APYs exceeding 6% for USDC, while short-term treasury bills are yielding approximately 5.5%. The current USDC.wh kink APR stands at 4.8%. This variance in interest rates can give rise to inefficiencies.
Next Steps
Gauntlet will review and offer recommendations for modifying the IR parameters for USDC.wh and xcUSDT. One potential adjustment to consider is raising the Borrower APR at the Kink. This adjustment aims to mitigate the volatility in borrowing rates after the kink, as illustrated in the chart below. Such a modification can potentially prevent excessively high borrowing rates, as observed on November 8th.
