Status: Stage 0 - Discussion
Author: @countvidal & @sebastian
Proposal Steps
Tweak existing FeiRari Fuse Pool Parameters:
- Reduce Close Factor from 50% to 33%
- Reduce Liquidation Incentives from 10% to 8%
- Increase FEI, ETH and DAI collateral ratio from 75% to 80%
- Update to FEI IRM
- Reduce FEI Base Rate from 2.73% to 0%
- Reduce FEI Initial Slope Multiplier from 36.40% to 5%
- Reduce FEI Second Slope Multiplier from 1650% to 400%
- Update to TRIBE IRM
- Reduce TRIBE Base Rate from 2.73% to 0%
- Reduce TRIBE Initial Slope Multiplier from 53.75% to 20%
- Reduce TRIBE Second Slope Multiplier from 4000% to 400%
- Update to DAI IRM
- Reduce DAI Base Rate from 2.73% to 0%
- Reduce DAI Initial Slope Multiplier from 53.75% to 8%
- Reduce DAI Second Slope Multiplier from 4000% to 400%
- Update to ETH IRM
- Reduce ETH Base Rate from 2.73% to 0%
- Reduce ETH Initial Slope Multiplier from 53.75% to 6%
- Reduce ETH Second Slope Multiplier from 4000% to 400%
Motivation
The FeiRari pool’s existing parameters are relatively conservative and not friendly enough to be competitive in terms of borrowing. We have analyzed the various parameters and come to the conclusion that to make the pool more efficient, we must propose some changes.
The plan is to make them more aggressive in order to attract borrowers, as the DAO can supply FEI to bootstrap the market. We will also take advantage of this opportunity to tune the parameters of the other three assets in the pool. We have seen the performance of the pool over two weeks and now we are ready to update the parameters to drive higher volume to it. The DAO has already supplied 10M FEI upon taking over the pool and it is possible it supplies even more FEI in the future. This makes this parameter tuning exercise more focused on attracting FEI borrowers.
Specification
We propose to drop the close factor from 50% to 33% to increase protection for borrowers. A lower close factor will prevent borrower’s collateral from being liquidated beyond necessary to maintain a healthy balance. This should incentivize borrowers to prefer our pool, given that we offer more protection for their collateral than AAVE or Compound.
In the same vein, we propose to reduce the liquidation incentive from 10% to 8%. We believe that a liquidation incentive of 10% is too much in favor of liquidators. A high liquidation incentive is appropriate when a pool contains rather illiquid assets. Our pool contains 3 assets that are fairly liquid and a fourth asset: a governance token that is organically illiquid but practically liquid given the liquidity mining incentives. As such we think it is appropriate to offer further protection for borrower’s collateral by reducing the liquidation incentive from 10% to 8%.
The chart above depicts the relationship between Collateral and Debt at a Collateral Ratio increased to 80% from 75% and a Liquidation Incentive reduced from 10% to 8%. The area above the green line represents what can be borrowed. The area between the red and orange line represents the profit to liquidators from liquidation incentives.
The collateral ratios for FEI, ETH and DAI are to be increased to 80% from 75%. We believe this will incentivize people to deposit more collateral as they can achieve higher leverage than before. 80% is the standard collateral ratio offered on AAVE. It is possible, in the future, that we increase the collateral ratio
The FeiRari Pool currently has interest rate models that charge borrowers high interest rates. The FEI DAO wants to supply FEI and incentivize people to borrow FEI. To do this we will be proposing a lower interest rate model starting at 0% and slowly growing up to 4% at an 80% utilization ratio. Once an 80% utilization ratio is reached (the kink), we will apply a 400% multiplier that causes the rate to skyrocket up to 84% at a 100% utilization rate. The reason for this increase at the end is to try and penalize borrowers from using up all the liquidity and not allowing lenders to be able to exit their positions.
The TRIBE interest rate model is more expensive for borrowers in order to discourage short interest on TRIBE… We propose starting at 0% and moderately escalating until reaching 16% at an 80% utilization ratio (the kink) and then jumping up to 96% at 100% utilization.
For DAI and ETH we want to have a lower rate than for TRIBE but higher than FEI to incentivize people to deposit and earn yield. We propose starting at 0% and moderately escalating until reaching 6.40% for DAI and 4.80% for ETH at 80% utilization (the kink) and then skyrocketing up to 84-86% interest rates at 100% utilization.
| Utilization | FEI | TRIBE | DAI | ETH |
|---|---|---|---|---|
| 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 5.00% | 0.25% | 1.00% | 0.40% | 0.30% |
| 10.00% | 0.50% | 2.00% | 0.80% | 0.60% |
| 15.00% | 0.75% | 3.00% | 1.20% | 0.90% |
| 20.00% | 1.00% | 4.00% | 1.60% | 1.20% |
| 25.00% | 1.25% | 5.00% | 2.00% | 1.50% |
| 30.00% | 1.50% | 6.00% | 2.40% | 1.80% |
| 35.00% | 1.75% | 7.00% | 2.80% | 2.10% |
| 40.00% | 2.00% | 8.00% | 3.20% | 2.40% |
| 45.00% | 2.25% | 9.00% | 3.60% | 2.70% |
| 50.00% | 2.50% | 10.00% | 4.00% | 3.00% |
| 55.00% | 2.75% | 11.00% | 4.40% | 3.30% |
| 60.00% | 3.00% | 12.00% | 4.80% | 3.60% |
| 65.00% | 3.25% | 13.00% | 5.20% | 3.90% |
| 70.00% | 3.50% | 14.00% | 5.60% | 4.20% |
| 75.00% | 3.75% | 15.00% | 6.00% | 4.50% |
| 80.00% | 4.00% | 16.00% | 6.40% | 4.80% |
| 85.00% | 24.00% | 36.00% | 26.40% | 24.80% |
| 90.00% | 44.00% | 56.00% | 46.40% | 44.80% |
| 95.00% | 64.00% | 76.00% | 66.40% | 64.80% |
| 100.00% | 84.00% | 96.00% | 86.40% | 84.80% |
Vote
- Base Collateral Ratio
- 75%
- 80%
- 85%
0 voters
Appendix
Close Factor Example
For example, if you had collateral of $100 worth of ETH, borrowed $75 worth of FEI and then with a price decrease in ETH your collateral drops to $99 worth of ETH, with a 50% close factor, a liquidator can come in and re-pay up to $37.5 (50% of $75) worth of FEI. Repaying just $0.75 worth of FEI would have brought your account back into compliance with the required collateral ratio of 75%. The liquidator has an incentive to repay as much as possible even though it may be excessive for the borrower. In this case the borrower’s collateral ($99) drops by $37.5 plus a liquidation incentive (in this case 10% or $3.75) for a total of $41.25. Collateral would now be $57.75 and debt (borrow) would be $37.50 which is a collateral ratio of 65%. This is 10% less than the maximum ratio of 75%. The liquidator excessively took possession of the borrower’s collateral beyond the required maintenance ratio.