[Proposal] Transition from One-Time Fees to Interest Rates

Proposals
1

We are writing to propose a shift from the current one-time fees model to an interest rates model. Under this proposed model, a fixed annual interest rate would be charged on the collateral of new open positions.

Currently, it is more prudent to borrow R than to purchase it in the open market due to limited financial consequences for keeping positions indefinitely open. The motive behind this proposal is to support the stability of the R peg by increasing buying pressure for R in the open market. As part of this proposal, 50% of the earned interest would be distributed to R holders who have deposited into the R Savings Module, creating a competitive R Savings Rate (expected to range between 5-10%) in comparison to other stablecoins like sDAI. For further information on the R Savings Module proposal, please read: [Proposal] Introduction of the R Savings Module - #4 by yusa

The remaining 50% of the earned interest would be allocated to RAFT stakers once the token is live. More details about this will follow.

Key features of the interest rate model:

  • Existing collateral types (stETH and rETH) will have a fixed interest rate per annum of 3.50%.
  • New collateral types being considered will have a fixed interest rate per annum of 3.50% for swETH and cbETH, and 3.00% for WETH and WBTC.
  • Existing borrowers will be unaffected by this transition. However, they will not be able to increase their debt position (i.e. generate more R) going forward unless they close their position and open a new one.
  • Prior to the transition, the existing stETH and rETH markets will be frozen and borrowers will no longer be able to mint more R using these markets. They can, however, top up their collateral, or repay their loans.

Anticipated positive effects for the R peg

By distributing 50% of the earned interest to R holders who have deposited in the R Savings Module (together with the sDAI yield in the protocol reserve), we aim to achieve an R Savings Rate with an anticipated APR between 5-10%. This rate would surpass the DAI Savings Rate, consequently inducing buying pressure in the open market and helping the restoration of the R peg.

Conclusion

Please review this proposal and let us know your thoughts. If favorable, the proposal can be implemented in the next couple of weeks.

4 Likes
2

A while back I wanted to leverage up Eth and went on a research spree, comparing CDP and lending platforms. Raft (and Gravita) were the only ones that let you borrow against staked Eth, keep the yield, without an interest rate.

If you proceed with an interest rate of 3.5%, you will kill your competitive advantage as at that point there’s no differentiator against Liquity. 3.5% more or less entirely offsets the yield from staked Eth so we’re back to borrowing against Eth at 0% interest but with a lower LTV and higher risk (Liquity is more battle tested).

That being said I don’t think that adding an interest rate is unreasonable, for example I think that something like 1% would strike a good balance between keeping your competitive advantage and helping the R peg.

2 Likes
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I think this would kill your competitive advantage.

I guess a much lower rate would be better, like 1% would be fine and raft would still be one of the best or the best option.

But with the rates you propose, I doubt more people will be interested in the protocol than those of us already in it.

1 Like
4

I don’t understand how you can propose charging borrowers 3.5% but have a savings module paying 5-10%. Maker tried to pay 8% dsr with a 3% borrow rate. It didnt’t work. The spread was too high and way too many people were happy to borrow and then immediately deposit into the dsr. It was not sustainable. I don’t see why R would be any different.

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1% would only work if we bleed money and make up for the difference between the income (1% per annum in this case, plus liquidation fees) and on the other side it’s 6% fixed APR. We’d need to cover 5% from our pockets, which on $100m is $5m per year, otherwise the peg won’t be at $1.

1 Like
6

It is easily sustainable in my opinion.

3.00 - 3.50% APR per annum fee for CDPs is reasonable and we can make it sustainable unlike Maker. How?

Income from protocol reserves:

  • We acquire sDAI via the PSM which pays 5% APR at the moment.

Income from CDPs:

  • Borrow fee of 3.00% to 3.50% APR (depending on the collateral that’s used to borrow) together with protocol liquidation fees (amounting to 10% of the collateral approx. for every position liquidated) plus flash loan fees etc.

Expenses: Whatever the Savings Rate pays, planned to be 6% APR. The income should add up to about 5.50-6% per R borrowed in my opinion depending on market volatility.

The other important thing to adjust for when thinking about the numbers is that not all R will be staked in the Savings Rate.

The R Savings Rate will put buying pressure on R, which will increase its price to $1 (and beyond), and the PSM will reset it to $1 if that happens and the protocol will acquire sDAI at the same time.

On your question of why would anyone use this:

  • You know how much you’ll pay upfront via the fixed rate.
  • Peg is stable at $1 because of the PSM + R Savings Rate
  • It’s more capital efficient than Maker (minimum collateralization is way lower, more suitable for leverage)
  • It’s slightly cheaper than Maker
  • Much improved UX
2 Likes
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Sustainability aside I’d love to see a response to the notion that at 3.5% interest, it’d negate the yield from staked Eth and at that point I don’t see why people would go for Raft as opposed to more established players. Specifically Liquity would have higher LTV and lower risk.

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On Liquity you can only borrow against ETH, not any of the collateral types that we support, or will support.

Also, there is no such thing as a free lunch. In Liquity, the LUSD peg is supported by incentives on a single sided staking pool (Stability Pool) in LQTY, which creates selling pressure on the LQTY price. It’s a design that favours borrowers over LQTY tokenholders in this low interest rate environment. If incentives are reduced or stopped, the price of LUSD falls to around $0.99 where a redemption loop starts.

We’d prefer to go for a more balanced approach in this bear market where our future RAFT tokenholders don’t get rekt.

2 Likes
9

Borrowing against ETH on Liquity at 0% interest and 90% LTV is preferable to borrowing against stEth at 3.5% interest and 82.5% LTV, as the staking yield is negated by the interest rate and you end up with lower LTV and higher risk.

There is a middle ground where you let depositors keep a portion of their staked Eth yield by ranging interest rates from 0.5% to 2.5% for example, perhaps in proportion to R depeg (so kind of a variant of Vesta’s model, but capping the interest rate below the staking yield, otherwise you kill adoption as well).

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While I like the concern for future RAFT governance holders,
Interest Rates on yielding Collaterals kills our competitive advantage.
Plus at 3.5% interest rate, aren’t we(borrowers) taking more risk than on Liquity or Maker, as we are straight away sacrificing yield and holding a derivative.
It also disincentivises borrowing as, Anyone interested in borrowing stables, would now simply borrow it on another platform, swap into R and access the savings rate, penalizing borrowers to satisfy LPs. where as previously, most LPs were borrowers themselves.
Plus, it will only take a protocol to launch a CDP or pendle derivative with savings-R to create a APR siphon. which reminds me of UST-MIM DEGEN strategy. If this should happen, the transition would, hurt Borrowers, while completely failing to satisfy LPs either.
Moreover, the previous redemption model, only hurt users who were close to the liquidation levels, there by incentivising healthy positions. but now it will hurt across the entire borrowing landscape.

Borrowers are currently taking liquidation risk, derivative risk and new protocol risk, while creating liquidity for the protocol. Do we really need to make it worse for borrowers to pitch a better rate ?
I feel thats tilting the equilibrium a bit more towards holders.

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Plus at 3.5% interest rate, aren’t we(borrowers) taking more risk than on Liquity

On Liquity (this also addresses @Junglebook point):

  • Your collateral does not earn yield and you pay a 0.5% borrowing fee. With R, the staking yield would basically more than offset the interest rate and, for short term loans, it is actually more convenient than Liquity since there will no longer be a one-time fee

  • You risk being redeemed against and lose your ETH exposure. To avoid that, redemptions must be replaced with a more efficient mechanism, which is the PSM that Raft is implementing (other major stablecoin issuers are going in the same direction now)

  • The LUSD peg has always been heavily reliant on LQTY incentives on Stability Pool. With R, you receive a yield in a stablecoin that is not heavily subsidized at the expenses of protocol tokenholders

As far as Maker, you can currently borrow 57 DAI out of $ 100 wstETH and pay 5% stability fee. In Raft, you would be able to borrow 83 R out of $ 100 wstETH, pay 3-3.5% interest rate against. With the latter, you have more borrowing power and less cost of borrowing. Looks like a no-brainer to me.

It also disincentivises borrowing as, Anyone interested in borrowing stables, would now simply borrow it on another platform, swap into R and access the savings rate, penalizing borrowers to satisfy LPs. where as previously, most LPs were borrowers themselves.

Borrowers benefit from a tight peg. With stablecoins like LUSD or eUSD which have traded / are trading above peg for a long time, borrowers pay an extra fee when they repay the loan. As a consequence, LUSD and eUSD need to be heavily incentivized in native tokens to offset such hidden fee. If you borrow at $ 1 and, after 3 months, you need to close your loan at $ 1.03, you paid 3% in 3 months, which is 12% annualized

Moreover, the previous redemption model, only hurt users who were close to the liquidation levels, there by incentivising healthy positions

That’s Liquity. The R redemption model affected all borrowers in proportion to their collateralization ratio

In general, if you look at the stablecoin adoption, a tight peg is the only way forward to increase the supply. That’s one of the reasons why LUSD has been below $ 200 mln market cap for the last year and a half.

3 Likes
12

wow, thanks for the clear detailed answer.
that actually clears alot of my concerns.

13

This kills it for me. I will move on.

This puts Raft in the competitive interest rate borrowing game. Other players are way ahead.

Hope you don’t do it.

14

Personally, I like this suggestion. But should also adjust the interest rate down to a level that both sides can accept

1 Like
15

It’s fascinating to see the proposal transition from one-time fees to an interest rate model. However, the concern raised by Junglebook regarding the potential negation of staked Eth yield by a 3.5% interest rate is valid. Finding a balanced middle ground for interest rates seems like a key consideration. I’m also curious about how this transition might affect user behavior, especially with more established platforms in the mix.

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Not so sure about this proposal. The one-time fee was why I came to Raft: Allowing me to play the long game without worrying about interest rates.

1 Like