DeFi Rate Votes “Against” Compound Proposal #12 – cDAI Interest Rates

Following Dharma’s recent governance piece on proposal #11 along with our continued efforts on transparent governance, DeFi Rate will be releasing our rationale behind Compound Governance votes in a series of blog posts. 

Proposal #12: Update cDAI Interest Rate Model (Forum Discussions here) 

Proposer: Dharma

DeFi Rate Vote: Against

Voting Weight: ~10,250 COMP

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Background

Compound Proposal #12 by Dharma proposes to update the cDAI interest rate model, aiming to decouple the existing interest rate model from Multi-Collateral DAI.

The proposal looks to change a handful of key parameters with the current model. In short, this includes:

• Changing the Interest Rate at 100% Utilization Rate from 15% up to 25%
• Change the utilization rate that defines the “kink in the model” from 90% utilization down to 80% utilization 
• Changes the slope of the model prior to the kink from 2% up to 4%
• No changes to the 0% base rate which is the interest rate offered at a 0% utilization rate

The core purpose of this proposal is to decouple Compound’s cDAI interest rate model from the Multi-Collateral Dai parameters. While there’s plenty of rationale behind having cDAI interest rates in line with MCD parameters – like offering competitive borrowing rates to Maker’s stability fee – empirical data from April to June 2020 suggests that third-party DAI lending and borrowing markets are diverse enough to not have to directly compete with Maker rates. This is exemplified with dYdX and Aave where borrowing rates ranged from 3-5% while both respective protocols experienced sufficient demand for borrowing activity.

DAI Borrow Rates

Rationale

While the Dharma team has executed best practices in line with decentralized governance, and we believe this proposal has reasonable merit, we’ve concluded that changing the interest rate model following the recent incentive change with COMP distribution is a bit too quick. With COMP being now distributed based on borrowing demand, DAI has been the biggest recipient of new capital and the next target for “crop rotations”.  In less than 24 hours, hundreds of millions of DAI have been locked in Compound with lending rates increasing from 0.68% APY to upwards of 4.77% APY. While it’s still historically lower than some of the DAI rates we’ve seen in the past, given the DSR is still at 0%, we believe the ~4% APY is sufficiently competitive with the rest of the market – especially with the bonus incentive to earn COMP.

DeFi Rate is voting “AGAINST” as we want to wait for the dust to settle and have a full understanding of the effects of the new market dynamics before we make any further adjustments to the interest rate model. At the end of the day, there’s solid rationality behind decoupling from the MCD parameters and DeFi Rate is more than happy to revisit this proposal (and vote “For”) in the coming weeks once the short-term mania has subdued and if the implementation still makes sense.

We want to offer lenders and borrowers the best possible rates on the market, and we believe Dharma’s proposal would do that. However, we’re electing to defer this proposal until more time has passed with the new COMP incentive model.

DAI Lending Rates

In Closing

While Dharma’s proposal to change interest rate models was thoroughly discussed among the Compound governance community and was proposed in compliance with our governance standards, the recent and significant changes to COMP distribution model have shifted the market dynamics a fair amount. As such, we’d prefer to wait until there’s more data on how the new COMP distribution is affecting the market. As mentioned, we’re happy to revisit this proposal in the coming weeks once the dust has settled from the new “crop rotation” to DAI.

If you appreciate our governance process and decisions, feel free to delegate your COMP to DeFiRate.eth. If you have any further questions or comments on how we can improve our governance processes, feel free to let us know by reaching out on Twitter!