Our current system for setting interest rates is rather ad hoc. This creates confusion for borrowers who aren’t sure what to propose and combined with the natural slowness of decentralized governance can create a frustration experience for people trying to use the platform. With this in mind, I believe its critical we create a clear framework for setting interest rates that the team can apply automatically. I would like to start with a rough proposal for setting default interest rates solely based on utilization.
There are a few constraints for this framework.
- It needs to be function transparently. Unlike Tradfi, customer can see(and participate in) lender discussions and our formulas.
- Needs to approximate our target utilization with minimal manual input.
- Provides clear expectations for lenders and borrowers.
The base-fee model used by 1559 fits all of these. It has a target utilization(50% for it), and increase or decreases fees on a set schedule based on utilization. For us, that could look more like “Target a utilization of 70-80%. Once a week, the base rate is increased or decreased based on utilization”.
I like this system as a base rate because it requires no external information or guesswork. We would need a separate variable for credit worthiness(which deserves its own discussion really). It may also be worth setting a minimum rate.