The team appreciates the positive response to the precautions taken around the lending pools over the last week. In the team’s judgment, the community’s mature and cautious approach is an extremely positive indicator for the Algofi DAO’s long-term success.
Yesterday the lending pool staking contracts for STBL2 / ALGO, STBL2 / goBTC, and STBL2 / goETH launched, emitting BANK rewards to suppliers. This is expected to drive supply from the lending pool markets to the staking contracts materially in the coming weeks. While rewards are expected to be the primary drivers, they cannot be guaranteed to drive the migration of all liquidity.
As such, to finalize the migration, the Algofi core dev team proposes to gradually reduce the collateral factors of the live lending pool markets (excluding STBL2/USDC). This will have the effect of motivating borrowers to swap their lending pool collateral into other collateral assets or to repay their borrows to avoid liquidation. The proposed reduction schedule is:
This action is in line with steps taken by peers in other ecosystems to unwind their more volatile collateral markets (e.g. Solend). This approach has been effective in drawing down the size of these markets.
What is the motivation for wanting to move all liquidity in these pools from lending to staking? Will the reduction of collateral factors not catch borrowers off guard and get them liquidated? And why were these lending markets created in the first place?
I’m not sure it would be totally necessary to reduce the collateral factor to 0. Maybe leaving it at ~20% would suffice to keep risk down, but still allow flexibility. Are the risks of having these LPs as collateral as big as it seems? Or, is it just knee jerk in reaction to what’s been going on?
I notice that voting on the proposal will continue for another 11+ days, right to the time of the first reduction of collateral factors. Shouldn’t there be some more time between end of voting and first reduction to be able to communicate the results?
Ultimately, this appears to me to be a knee-jerk reaction that doesn’t solve the cause of the problem by reducing the collateral factor. Will there ever be a reintroduction of these LPs being collateral?