Idea: Fei Protocol Target Rate
Formally adopt and publish monthly a quantitative benchmark target interest rate. Monetary policies and lending deployments can be created in the future to achieve this interest rate.
An fairly early goal of Fei’s lending deployments has been to provide a consistent, low interest rate to borrowers; which would in turn incentivize the usage of the stablecoin itself.
In the operation of Optimistic Approval, and in the history of FEI’s lending deployments itself, FEI’s realized interest rates have fluctuated wildly on Rari pool 8, Aave and other platforms. The OA has been by and large unable to deal with short term rate fluctuations since it is handicapped by the lack of FIP mandates and operational guidelines.
Many users have voiced concern in discord about the instability of interest rates. Stable interest rates are a top policy goal for nearly all operators of monetary policy worldwide and given that many of the initial motivations of suppressing FEI’s borrowing rates have not changed. It would be prudent to create a target interest rate which will guide future deployment and minting of FEI.
With the merger of FEI and Rari, Fei Protocol’s ability to influence its own borrowing market has substantially increased. Thus
If approved in principle, the author will elaborate follow up proposals which will seek to authorize minting and deployment of new FEI on a dynamic basis to bring the prevailing borrowing rates of FEI across different platforms to match that of the FPTR.
The proposed Fei Protocol Target Borrowing Rate will be a weighted average benchmarked initially composed as follows: (The following numbers are for illustrative purposes only, authoritative figures will be published pending further discussion and finalized by the time of a potential DAO vote)
In the initial proposal, the author proposes that this target interest rate be updated once every month. This predetermined date (potentially the first of every month) where the new FPTR is published will be known as “Benchmark Date”.
|Weight||Figure (Feb 3 2022)||Weighted value|
|Aave USDC rate (30 days avg)||10%||3.56||0.356|
|Aave USDT rate (30 days avg)||10%||3.81||0.381|
|Aave DAI rate (30 days avg)||10%||3.85||0.385|
|COMP USDC rate (30 days avg)||7%||4.09||0.2863|
|COMP USDT rate (30 days avg)||6%||3.76||0.2256|
|COMP DAI rate (30 days avg)||7%||4.38||0.3066|
|Aggregate Defi rate||3.881|
|Bloomberg Fixed Income Indices - U.S. Government/Credit (snap reading on benchmark date)||10%||2.05||0.205|
|Moody’s Seasoned Aaa Corporate Bond Yield (monthly average)||15%||2.93||0.4395|
|30 year Fixed Rate Mortgage rate (snap reading on benchmark date)||25%||3.55||0.8875|
|Fei Protocol Target Rate||-||-||3.4725|
- Aave and COMP 30 days average rates shall be the average of the last 30 days as referenced by Defi Rate.com’s data feed.
- 30 year Fixed Rate Mortgage rate will be based on figures published by Freddie Mac
- Bloomberg Fixed income Indices shall be the imputed yield as reported by WSJ’s benchmark aggregation
- Moody’s Seasoned Aaa Corporate Bond Yield shall be based on the reading provided monthly by the Federal Reserve Bank of St. Louis
Analysis and justification of the benchmark
One of the earliest goals of FEI lending deployments has been to subsidize and push FEI’s borrowing rate for users to a level that is competitive with other stablecoins. Therefore the most important element of the benchmark would be to track realized borrowing rates of USDT, USDC, and DAI. (totalling almost 80% of all stablecoin market cap)
The rate of these three tokens on Aave and COMP (the most used lending platforms, and ones with the overall best security track records and history data for analysis), consists of 50% of the benchmark weight. Aave has a higher weighting because its TVL is almost double that of COMP.
Historically, Defi borrowing rates can be highly volatile because utilization ratios can swing wildly due to the actions of large market actors. To minimize statistical disruption, a calculated 30 day moving average is used for Defi borrowing rate readings. This element is meant to best approximate the mainstream lending rate of the wider Defi ecosystem. It will be separately published as the Aggregate Defi Rate (ADR)
Given that one of the policy goals of FEI is to provide a lower rate than other comparable stablecoins, the target rate is designed to be structurally lower than the mainstream Defi rate. The remainder of the benchmark is designed to achieve this consistent undercutting at a sustainable rate that is difficult to manipulate.
The 30 year Fixed Rate Mortgage rate is one of the most quoted figures across the US Dollar lending market, and consists of over 70% of all mortgage loans originated. This rate itself is heavily informed by US Prime lending rates and other key figures in the wider lending market; therefore it is a good proxy for high quality retail customer borrowing rates. Given that Defi loans are fully collateralized by risk assets, ADR can be seen as somewhat analogous to mortgage loans which are collateralized by underlying real estate and are not pure credit loans. Given time, the author theorizes that FRM rate can substantially converge with the ADR as the Defi lending market fully matures; due to the similarities in their underlying.
It is given the highest weight at 25% because it is considered to be a leading indicator for the state of the wider USD consumer lending market. High alignment with this rate would mean that FEI would not become a target for interest rate arbitrage from financial institutions, and prevent Fei Protocol from lending out funds at unsustainably low rates even if the wider Defi market was to provide artificially low borrowing rate readings for a short time.
Instead of an average rate, the snap reading on Benchmark Date will be used to reflect the latest market developments. As this is a highly watched rate, chances of statistical manipulation is negligible.
Moody’s Seasoned Aaa Corporate Bond Yield is introduced here to provide a proxy for what borrowing rates in a fully mature lending market for borrowers of the highest credit rating might look like. Historically ADR and even 30 year FRM rates have consistently been higher than Aaa corporate Bond Yields, which can be seen as a sort of a risk premium for participating in an immature market like Defi.
Although this rate is not wholly analogous to collateralized loans to retail customers in Defi, it is introduced at 15% weight to provide a very stable anchoring point which historically trended consistently lower than the 30 year FRM rate. This would act as a way to undercut the ADR without exposing the Fei Protocol to potential arbitrages.
The US government Bonds average rate has historically been the cheapest rate that any market actor (government) can consistently borrow massive amounts in US dollars. The Bloomberg GOV/Credit index tracks a basket of bonds issued by federal and local authorities. This element is meant to consistently undercut the ADR by a large margin given they are assigned very low to zero risk by the bond market. This market is not very comparable to Defi lending markets in nature; it is introduced at a 10% weight to represent the realistic floor of USD borrowing rates and as a means to consistently achieve the policy goal of undercutting the ADR in a hard to manipulate way.
This proposal is currently not intended to go to a snapshot vote. It is an idea, if widely agreed in principle, that is meant to lead to other proposals that might call for the enactment of:
- A group that would be responsible of maintaining and publishing the Fei Protocol Target Rate on a monthly basis
- Measures that would empower existing or new bodies (such as the Optimistic Approval Squad) to enact FEI deployments that would align the prevailing borrowing rates of FEI to the FPTR
- Development of automated algorithms that can maintain the FPTR across major lending platforms to a more accurate degree than is possible with human deployments.
- Potentially creating a new class of fixed interest lending on Rari giving out loans at FPTR