Hi everyone, let’s talk about interest rates for xUSD vaults.
Some pre-amble to frame our discussion:
Currently xUSD vaults charge 3% interest annually (in xUSD, by adding to your total debt). Interest rates can be updated via the admin account which is controlled by the CompX team but it’s not something we would take lightly.
The modification of the interest rate is one of a number of levers that CompX has to affect vault owner behaviour in regards to their management of xUSD debt.
As of writing the xUSD value is ~$0.97, not at peg but not completely off as it was a couple of weeks ago which is an improvement but we must strive to ensure the strength of the xUSD token and as above, interest rate changes is one way we can affect things.
For this discussion I’d like to get feedback and suggestions on 3 points:
Interest rate review and change frequency
Interest rate change limits
Dynamic interest rate calculation parameters
If you’d like to participate in the discussion please indicate which point above your referencing so it is clear - feel free to comment on all point or just a selection. I will try to keep this discussion on track to the 3 points.
I think a monthly rolling review with a 30 day notice period of rate increases would be good. Until we have our governance portal ready and powered by the COMPX token I suggest we use this forum to discuss each month on potential changes.
I’d propose a 5% limit in change of the interest rate at any given time, up or down.
I think that the params that should be considered as part of dynamic interest calculations would be - in no order - xUSD value against USD, total collateral value in USD, total debt in USD.
I like the 30 day period and the 5% up or down sounds ok but would hear from some of the other vault holders . Wow the governance when set up going to be fire as I would say be nice if people join the xbacked discord and we have a gov channel be nice to talk this there as well with people who have skin in the game holding and using xUSD and or using the vaults
30 day might be nice for the xUSD minters but its again prioritizing current minters over the peg since 30 days is a lot of time especially in crypto. Peg should be your number 1 priority as without peg you will have no adoption at all imo. You need to be able to move faster and I think if there is a plan for a reduction, like peg gets better → rate reduction depending on how good the peg is and a reduction should be possible without waiting more than 3 days for example
you need a complete plan for how to handle peg issues depending on the mentioned variables. shortsighted actions like let us change the interest rate right now by X% without a plan to reduce it won’t make current minters happy imo
+1 for lobo here. We need something quite more granular than 30 days to monitor the peg. Algofi used a rotating 24 hour window. If it remained greater than 1% below peg 0.5% would be added to the interest rate and vice versa if it was above the peg. Rinse and repeat. That’s not to say it’s the “right way” to do it, just that’s what comes to mind when I think of proactive peg management.
As there’s talk of the smart contracts being rewritten, in the future this could likely be automated.
You thank we can cut the time frame in half maybe 15 days to change the % rate and the other reason for this was because we getting a lot of people asking for time before it changes but all this is only for now until the contracts get redone and then it changes automatically like folks finance does then we be rolling
Thanks Lobo - What would you suggest as a decreased timeframe for modifying rates? Would you see any discussion with the community happening within that time?
On 2, as I’ve mentioned numerous times - there a factors, variables etc that maintain or stabilise the peg - interest rates is just one of them - lets keep the conversation on that specifically.
I think even on automated scripts it’d be good practice to have it be well understood and consistent with any rate changes.
Like this thinking! Thank you!
@dashawn.algo - yeah 15 days could also work, I’m aware people wanted a decent amount of time given before changes were affected, hence the rolling month idea - but I’m not opposed to either.
Yes, contracts will be re-written and automation can come in, but this is still an important subject around how rate increases - and in a dynamic world, the base rate changes, are communicated.
The raising of the interest rate doesn’t need to be just a penalty for vault owners, it can also be a reward. Think of a portion of the interest that’s being paid out getting added to the xUSD staking pool, so that would be an hodling incentive as well. Now it’s not just trying to scare vault owners into paying off debt, but also a reason to hold xUSD in the protocol. That’s the interest rate doing twice the work for you!
Using a finger-in-the-air approach to gauge public opinion on the issue is not a viable solution.
I recommend using MakerDAO as the model. A monetary policy encoded and enforced by smart contracts is required.
The first step is to define the monetary policy goals. I’ll get you started:
To maintain a 1:1 peg for xUSD:USDC
To maintain deep liquidity for xUSD:USDC
Algorand needs a robust native decentralized stablecoin. I also recommend meeting with Folks Finance. Find out what it would take to get xUSD listed on Folks Finance. Folks Finance v3 will facilitate the seamless expansion of Algorand native assets across different blockchain networks.
This discussion is here to facilitate the community being involved in how we form this and other policies over time. We expect in the coming months to have our own governance portal where discussions like this will, hopefully, be commonplace. Please do not disparage the good ideas, thoughtful feedback and genuine interest by participants here.
I kindly asked everyone to stick to how this discussion should function in relation to the 3 main points in the opener as this discussion is specifically, and deliberately, only about xUSD vault interest rates.
Of course we’ve met with Folks Finance. In fact we’ve met and continue to meet with all ecosystem players on a regular basis.
@oysterpack
With that said - as your comment hasn’t got anything to do with the point of this discussion I’d ask that either you provide your insight on the 3 key points if you wish or if not, please refrain from derailing this discussion again. There are plenty other avenues for you to make your points - you’re free to use them - but this thread is not the place.
I have about 30k xUSD minted from xbacked right now but have been even more, so I actually use xbacked a lot and share my views based on my behavior and views as active user.
This will kind of touch all the parts, 1,2 & 3 at the same time, I think you should use curved fee model and keep base fee in 3% or even reduce it to 2,5% because small de-pegs will actual put rate bit higher,
Formula I suggest is ((1/px^3)x(1+base))-1, so for example if price is 0,99 and base 2,5% then ((1/0,99^3)x(1,025))-1=0,05637 ~5,6% but if price is 0,98 then interest rate will go up to 8,9%. of course if price is 1 then interest rate will be 2,5%. if price above $1, then fee 2,5%. In this model interest rate will go up sharply in case of de-peg. but also offers appealing rate when peg is in place.
using low base fee and curved interest rate model, you will “reward” user for keeping peg but you will “punish” for de-peg. I think this is most rewarding way to maintain peg. Flat increases will not help and for example in my case if base fee will be raised to be 5% for example, I will probably just close my positions because rate is just too high and I can not do anything about it. Also raised base fee will not fix the issue because it is not dynamic. But in curved model, if users collectively manage to return peg or keep it in place, they get lower fees and xBacked will also get what they want i.e. peg.
So I say keep it simple and decide one base fee level and one curved model that is known in advance, if model or base fee will fluctuate constantly, people will not probably open any loans, at least I won’t, because it will be too unpredictable.
What comes to migration period, I think just block new flat rate loans, so people will slowly migrate to curved rate model when they close old loans and only can open curved ones.
Ok everyone - Thank you very much for your help and ideas here - I have an idea of what we’ll do going forward but ill leave this open for another day just in case anyone wants to add anything further.
no discussion needed as long as everybody is aware of how the mechanism works and that its predictable aka X days with depeg of Y (90% of the time over the X days as a buffer for example) and then using a formula like the one ROAM suggested means I know what happens and when it will happen so I can make a decision based on that
I personally would like to see rather quick responses to peg because as I said its the most important thing for a stablecoin. To start maybe something like 3 days could work to test it out but ideally continous/daily responses would be good
Yeah, sorry I should have been clearer - I’ll close this discussion tomorrow and will post a separate thread to confirm what we’re’ doing going forward and again people can comment if they wish.
Fully agree and support what @ROAM says here r.e variable interest rates and flat fees
As long as there’s sufficient discussion and clarity between each period of rate changes until it can be automated into a variable protocol then I see no issues, i do feel every 24-48hrs is A rather short period for a clear discussion.
We’ll be able to automate this from the start. I think @ROAM has a good formula - I think it may be too aggressive so may wind it back a bit and I think possibly adding some caps of change per 24 hours may be good
but would hear from some of the other vault holders . Wow 
the governance when set up going to be fire 
as I would say be nice if people join the xbacked discord and we have a gov channel be nice to talk this there as well with people who have skin in the game holding and using xUSD and or using the vaults