We have two options.
Option 1, supply APR 0 %:
To your first point:
When we have supply APR 0 %, we do not have to care about any potential arbitrage flaws.
I think in this way we do not face any issues with bSTBL2/STBL2 problem you mentioned. At least I think so. But would be great if someone from dev team can confirm this.
More rationale behind 0 % later in other points.
I jump to your third point:
We can direct some of collected STBL2 interests to the poolers. For example, community treasury can automatically redirect 70 % (number from top of my head just for sake of example) from collected STBL2 interests to the poolers to tackle this issue.
To your second point:
This accumulation of “bad debt” is already happening in current implementation. Every time someone is borrowing STBL2 tokens and do not immediately supply back to algofi supply side, there is “bad debt” accumulating. So this is not a new problem. And this is basically what happens in fiat monetary system all the time. BUT with 0 % APR we can tackle this issue pretty well. Let’s think this from theoretical perspective. Let’s say I am the whole market for a second. I borrow STBL2 from Algofi and keep it in my wallet. Now, after some period of time I have for example 100 STBL2 tokens in my wallet but my debt is 101 STBL2 because of interests. Now I can’t pay this off completely because I present the whole market so there is no place where I can get more of these tokens. Only way is to take more debt to pay off the old one (classical central bank fiat currency problem). Now when we have 0% APR, the whole debt is “internal” debt because only creditor is Algofi. Algofi can let borrowers to pay the debt off partially or fully with other assets. For example with USDC (I will get back to this more in detail a little bit later). Now when someone will pay off their debt with USDC, there will be STBL2 in circulation without credit behind it. However, this is not an issue, because healthy amount of head room (not fully accurate term, but lack of better) in the market will increase liquidity without any side effects at least in theory. In longer term head room will settle in its “natural” level. Now other accepted stablecoin asset repays will increase the amount of head room in the market and on the other hand “bad/excess debt” will decrease it. Also we can reduce the amount with “buybacks”. Meaning we can allocate some of the USDCs (or other accepted stablecoins but have to be stablecoin because have to have 1:1 ratio) to buy back STBL2s from the market with price 0.999$. Can be algorithm that executes these trades automatically. → helps to improve price stability.
Now back to this part where possibility to pay off debt with other assets. Now this will be implemented using swaps in the middle. So for example if I want to pay off my debt using goBTC. I can insert the amount of goBTC and Algofi will swap this “behind the curtains” on the market to STBL2 tokens. So now STBL2s will be paid back with STBL2 tokens in reality and also reduces head room with rate of accrued interest, but from users point of view, it was paid with goBTC.
If user wants to pay off the debt with USDC or other accepted stablecoins, there is no need to swaps as I previously explained. It just adds head room and can be algorithmically drained from the market afterwards.
In this way there is no need for isolation modes or other similar tricks.
Option 2, lowered supply APR:
To your first point: We have to reduce the supply rate at least to the same level with discounted borrow rate. Normal borrow rate > discounted borrow rate = supply rate. If we do not, there is arbitrage opportunity. → I will borrow with discounted rate and move it to other wallet and deposit from there with higher rate. So arbitrage is normal borrow rate – discounted borrow rate = discount percentage.
Using this style where normal rate is 3.5 % (at least now) and discounted rate & supply rate is 2,8 %, I do not have idea if this causes some problems with your mentioned bSTBL2/STBL2 issue. Need to hear dev team’s opinion about this.
To your third point:
Using lowered APR rate we will tackle this incentivize issue with poolers more easily. And this shouldn’t be a problem. In here we can also direct some of the collected interests to the poolers.
To your second point: like I said before, bad debt is already accumulating all the time. But with lowered APR rate, we do not have “internal” debt, but rather general debt to Algofi and other creditors. This will cause more headache and I have to think if we can somehow tackle this problem. Issue in here is, how we can accept repays in other assets. In normal market conditions this shouldn’t be a problem but there might be real tail risk that can be realized in extreme market conditions.
Also with lowered supply APR rate there is no need to isolations or other tricks.
So my opinion is that we should go with first option and use 0 % supply APR rate.
I hope I answered all the concerns and questions you had.