Reasoning

Pool utilisation

DeltaPrime interest rate model is optimised to achieve high pool utilisation and simultaneously manage liquidity risk. High pool utilisation has several benefits. It leads to:

  • More capital efficiency

  • Lower spreads for borrowers/depositors

  • Faster DeltaPrime TVL/TVU scaling

Yet a highly utilised pool also lowers the buffer until a liquidity crunch occurs: The moment when borrowers can't borrow and depositors can't withdraw, because 100% of the pool is being utilised. The lower the risk of a liquidity crunch, the higher the ideal pool utilisation ratio. To evaluate the ideal pool utilisation ratio, and the interest rate surrounding this utilisation ratio, two variables are taken into account:

  • Opportunity cost

  • Volatility of asset

Opportunity cost

Future borrowing rates can be anticipated depending on an asset's opportunities within DeltaPrime. Before the GLP integration, the best rates on USDC (without impermanent loss) rarely exceeded 4-5%. Because of this, the mean rate for USDC tended to be lower than the rate of AVAX. With the integration, new opportunities arose, shifting the demand for USDC, and demanding a different interest rate model.

Of course, opportunity cost can also come from missed capital gains. When there is bullish sentiment, the mean interest rate for USDC can be higher than for AVAX. With bearish sentiment, this reverses.

Asset volatility

The risk of a liquidity crunch on an asset is also dependent on the volatility of that asset. An asset that is in the middle of a crash tends to be in high demand (if only to sell). Borrowers will want to borrow and sell that asset, whereas depositors would want to retrieve and sell their assets to manage their risk. An asset with a higher chance of dropping significantly in value, should have this reflected in its interest rates. This is not only to incentivize repayments at a high utilization rate but also to pay a fair price to the depositors, willing to lend out their assets during volatile times. In DeltaPrime this means that USDC is allowed to have a lower final interest rate than AVAX.

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