STBL2 borrow discount for BANK owners

Temperature Check
1

Hi,

Can we give BANK holders a discount on the STBL2 APR/interest rate? For example, 20 % off from the current rate. Discounted borrowing limit can be for example, 100 veBANK allows to borrow 1 STBL2 with discounted rate. This 20 % discount and 100 veBANK to 1 STBL2 ratio was just to give opening proposal and can be something else like 1 to 1 if more suitable.

This is not my idea rather taken from AAVE community. So idea behind this is to increase BANK value because then it gives BANK tokens some real monetary benefits and not only to be a governance token.

If we implement this, we have to take supply APR rate off (i.e. lower to 0 %) from STBL2 to avoid arbitrage. Because then someone can borrow with lower rate and transfer to another wallet and supply with higher rate.

This supply 0 % rate also brings another benefit to the community. Community treasury will gather all the interests from STBL2 borrowings. Third benefit is that this will potentially increase usage of STBL2, because it incentivizes to borrow STBL2 over USDC or USDT. And of course incentivizes Algofi users to own and lock their BANK tokens.

This same logic will be (according to current information) implemented to AAVE’s GHO stablecoin. I like to hear your thoughts about this matter.

If this matter is already discussed before, then I apologize, but I couldn’t find any thread about this.

2 Likes
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a great temp check! i have a few points:

  1. the supply APR would have to be lowered to the same percentage, doesnt need to be lowered to 0 or am I wrong? but i think it might be techincally challenging (?) to do this since STBL2 supplied to the lending market is converted to bSTBL2 which is a yield bearing asset, ie it rises in value at the supply APR rate. the protocol might be able to calculate the average supply APR and use that internally for the bSTBL2 value but how does it know which one receives the normal APR and which one the reduced one? and how does it work if i borrow it on one account and supply it on a different account? that would again just mean rehypothecation will be a problem again

  2. the thing is STBL2 going to the treasury means its out of circulation and this is ok if its a small amount but in the long run this could be bad since STBL2 removed from the circulation means it i theoretically not possible to pay back all the STBL2 loans

  3. if the supply APR is lowered that technically means LPs are a kinda disincentivized since all STBL2 pools are lending pools which earn the supply APR besides other things. so people buying STBL2 from the open market and supplying liquidity to one of the STBL2 pools would end up with less interest (again use other wallets?)

i think this would be a great usecase for BANK and as you have said further incentivize the use of STBL2 but i dont know how easy it is to overcome the points i menioned. maybe algofi would have to implement this using escrow wallets and dont allow you to transfer the STBL2 out and just use it inside the “algofi ecosystem”. but is that reduction of the borrow interest really useful then?

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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.

1 Like
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this sounds like its way more work for the devs, the supply APR was introduced so theres no need for a staking contract for STBL2 and such that you can STBL2 as collateral on the lending market and earning a supply APR

additonally now people know if they borrow STBL2 and use it to provide liquidity to a lending pool they essentially dont pay borrow interest rate as they earn it right back. with your idea it seems like this wouldnt be the case anymore (?) and for non-BANK holders it would def mean that this solution would disincentivize using STBL2

this solution looks a bit better imo but this also has the problem that it disincentivizes using STBL2 for non-BANK holders who want to provide liquidity to STBL2 lending pools. depending on the reduction tho + poolers still earn BANK emissions this might be ok. curious to hear other opinions on this

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Yes, it might be lot more work for devs, but this sounds more like an excuse. We have to think this from long-term perspective. But again would be great to hear dev team’s opinion because after all they are the ones who will do the actual work.

Maybe I do not understand what you mean (I do not mean this in a rude way at all. English is not just my first language) or I have missed something. But if STBL2 has infinite supply why we need lenders? Every time someone is borrowing from the Algofi, new STBL2 tokens are created, so there is no need for suppliers. And why someone would borrow and then lend it right back? Or if you mean poolers then we can direct the collected interests to them like I previously described.

And non-BANK holders can just choose stablecoin they like. Maybe lowest APR will be key factor in this. Or how much they trust one over the other etc.

But would be great to hear other’s opinions about this matter. And thank you Lobo for your thoughts!

1 Like
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to give STBL2 more usecases. we dont need them but if they can do it and earn supply APR which is not dependent on the borrow utilization its pretty good for them and incentivizes using STBL2 over others

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If acquired from secondary markets then yes. But you have a good point :+1:
this is just my opinion, but I think this is just minor negative side effect and will not be a show stopper.

1 Like
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So my approach in evaluating proposals like this is thinking about how they improve the product. I’m staunchly against doing anything primarily for the purpose of increasing the value of BANK. I’ve been fairly public about that opinion. The tl;dr is that the purpose of BANK is to enable users to make the Algofi Protocols more useful, not to allow BANK holders to extract value out of the Algofi. So I’m looking at this proposal from the lense of if it encourages people to use Algofi’s products more, not if it increases the value of BANK. However, I do think this proposal has merits on that front. Specifically around making STBL2 more attractive than USDC. If the price of BANK goes up as a consequence, that’s whatever. But the primary focus should be thinking about how this proposal potentially increases STBL2 usage.

I agree that a more competitive interest rate vs USDC or Tether would incentivize more usage of STBL2. One easier thing to do, would be to eliminate liquidation fees on STBL2 based on how much BANK someone has compared to their loan. This is a direct financial incentive to borrow STBL2 over other tokens without making huge changes to the interest rate models. Another easier tweak could be discounted fees in the LP pools where STBL2 or BANK are one side of the pair. Something like up to 50% off the swap fee. Again this offers direct financial incentive to use STBL2 over USDC or Tether. This would eat a bit into the earnings of Liquidity providers but that might be offset by additional volume. Because STBL2 LPs are mostly lending pools, liquidity providers would still be earning good interest rates just from the base lending rates.

3 Likes
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It really feels like @pescennius knows what he is talking about. I’ve come around to thinking about BANK with the same lens. BANK is an opportunity to participate in the future of Algofi as a voting actor.

I’m really indifferent to STBL2 usage. I believe USDC is the stable standard in most of the western nations. A great USDC experience on Algofi will help the platform go more mainstream based on what I see right now in the marketplace.

I plan to vote all of my veBANK to USDC products.

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I’m just a guy haha but happy someone else agrees on BANK’s function.

I believe USDC is the stable standard in most of the western nations. A great USDC experience on Algofi will help the platform go more mainstream based on what I see right now in the marketplace.

This is a bit off topic but USDC has its own risks. The clawback stuff when it comes to sanctions has been a huge issue for MakerDAO, which is the biggest (I think it still is) DeFi lending market in Crypto. On top of that, USDC isn’t a guarantee for stability. It is easier to trigger a run on USDC than Tether because redemptions are more open. Ultimately, you have to trust that the Banks that Circle uses are healthy, because there is no deposit insurance anywhere.

So I personally I hope to trust STBL2 more than USDC. If the liquidity can become deep enough and there is enough usage of STBL2 within the Algorand ecosystem, its backing can be more diversified than USDC and therefore more resilient. I love @lobo 's proposal on routing transactions through STBL2 pairs because it is a step in this direction.

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I see. I’m not a purist when it comes to decentralization. Yes, I favor it, but I also appreciate the work that has been poured into the industry from Coinbase and Circle. 2022 was the year of quality stables. 2023 should be more of the same for USDC. I want STBL2 to fulfill it’s mission. In addition USDC seems to be a symbol of quality. I’m very glad that USDCa exists.

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Yeah USDC is still the gold standard but it shouldn’t be considered risk free. I think there is a path to STBL2 being more reliable than USDC, given it inherits some of the stability of USDC by being backed by it.

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I think this is a slippery slope. Its important that liquidations happen to keep the protocol solvent and the liq-fee is the financial incentive that encourages actors to do so. I believe the fee is ~12-15%, of which 7% goes to the liquidator and the rest to the treasury. We could reduce the treasury’s cut.

This is all kind of moot in the short-term because I believe AlgoFi themselves do the majority of liquidations right now. But, if we value decentralization we need incentive to encourage others to write and run their own liquidation bots.

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We could reduce the treasury’s cut.

Great point and I think your idea is better, only the treasury’s cut should be reducible.

This is all kind of moot in the short-term because I believe AlgoFi themselves do the majority of liquidations right now. But, if we value decentralization we need incentive to encourage others to write and run their own liquidation bots.

I’m working on my own liquidation bot actually.

1 Like