Minimum Interest Rate For Borrowable Assets

Reason: The reactive interest rate model that was introduced with Ooki V2 is innovative in the sense of its ability to quickly adapt and change based on the current demand for borrowing. However, it has not been successful due to a flaw in the design when borrowing is not at the target utilization, which is currently at 80%. When the utilization rate is below 80%, the interest rate trends downwards in the hopes of spurring borrowing demand with the known potential outcome of the lending pool instead decreasing in size. The issue that has been shown to occur numerous times is that the borrowing market in DeFi has not been shown to be as efficient as expected so even with far better rates being offered, borrowers are not flocking to the protocol. This leads to rates continually decreasing and sitting near 0%. As the rates sit for an extended period of time near 0%, lenders have shown to be more efficient and leave the pools as there is no yield on their capital. This has resulted in a decrease in the size of our lending pools and consequentially, resulted in the inability for even a medium size user to margin trade or borrow. The idea of a reactive interest rate model is still something that has its merits as it can, after the pool usage has reached a certain point, dictate and settle on interest rates entirely on its own without updating the curve. To combat the issue that has been described, this proposal proposes to allow for setting a minimum interest rate.

Proposal: Add the ability to set a minimum interest rate for a specific asset that is available to be borrowed. This minimum interest rate is enforced at all times and can be adjusted as needed by the guardians. The rate will reflect the current market situation for the specific asset. The rates can be adjusted and the minimum interest rate can be removed if desired by the DAO.

Rationale: A minimum interest rate is likely to address the issue of the pool achieving a rate near 0%. What has been seen throughout many of the pools is utilization will at times drop to 40-50% and stay there for a few days. During this time the reactive rates trend toward 0% to entice borrowing but the issue seen is there is no borrowing demand no matter the rate being offered. This proposal will allow for setting a minimum rate that will be charged regardless of what the reactive rates formula produces and will serve as a way to provide a yield to lenders even if the lending pools are not operating as expected. This will ideally keep the liquidity within the protocol so as when a larger borrower wants to borrow, there is adequate liquidity to borrow.

Implementation: The minimum interest rate per asset will be set based on market rates for that asset. This will ensure it is not too high that it discourages borrowers and not too low to where it has negligible benefits. The minimum rate may be adjusted as well if there is a material change to the current market rates, whether it is up or down. Ideally, the minimum borrow rate charged will be lower than the market rate to still entice borrowing but not incredibly lower to where lenders will be discouraged and leave.

Benefits: This proposal is likely to keep more liquidity in the lending pools and actually benefit borrowers in the sense that liquidity will be more likely to be available to borrow as needed.

Drawbacks: There are no identifiable drawbacks with this proposal other than some borrowers may not enjoy the removal of the near 0% rates.

Difficulty of implementation: This proposal =can be done relatively easily. The most difficult portion is tuning the minimum rate properly and this will be done by looking at the current market rate for each borrowable asset and setting the minimum rate based on historical data of rates.

I support the proposal but before it was automatic, how much daily dedication will this need from main team? Will this slow down Ooki development?

Before the upgrade to V2, the interest rate was actually a curve based entirely on utilization that was manually set. The daily dedication for something like this is quite minimal as the number of times the minimum rate will be changed is very infrequent as its purpose is mostly to just ensure there is some yield going to lenders. Also, the time it takes to change the minimum rates are quite negligible if there is a significant change in the rates being offered on other protocols to warrant a change.

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Thank you for your reply

Thanks so much to the team for a very specific, clear, and easy-to-understand proposal in analyzing its pros and cons.

Indeed, if lenders know the minimum interest rate, they will have many choices to consider in their lending decisions.

But may I ask that when this minimum interest rate is set, will the dynamic interest rate model continue after that?

I love the amazing nature of the dynamic interest model : The reactive interest rate model that was introduced with Ooki V2 is innovative in the sense of its ability to quickly adapt and change based on the current demand for borrowing.

Yes. The minimum interest rate will only serve as a way to ensure borrowers pay at least that amount but if the reactive rates are higher then borrowers pay the higher rate

That’s great. Thank you so much for your reply. I support this proposal. Keep moving it on.

I would like to add some clarification in case it was not clear as this was not explicitly stated but the minimum interest rate is for the borrowing side only. the rate lenders receive is based entirely on the interest collected from lending activities. This proposal is for introducing a minimum interest rate for borrowers to pay whereas the rates lenders receive are entirely based upon the interest paid still.

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I am working on this. I think we are going to target this with the itoken-collateral changes.