As I continue to observe the industry and think about next steps for Balanced, MakerDAO has stood out as a good source for new initiatives. One particular area of interest is the DAI Savings Rate, which recently drew attention when it rose as high as 8%. It’s fueled by two key areas:
1.) Ongoing interest charged to DAI borrowers
2.) Additional incentives from revenue (e.g. interest earned from US government bonds purchased by MakerDAO)
I’d like to propose that the DAO begin preparations for a “bnUSD Savings Rate” using both of these initiatives as ICON gets closer to launching xCall on multiple networks. These initiatives go hand-in-hand, but I’ll focus this post on the mechanics of the bnUSD savings rate along with the first step to funding it, then lightly touch on how it feeds into the second piece.
Purpose: Increase demand for holding bnUSD
- Stake bnUSD
- Earn interest on your bnUSD
- Interest can come from many places, starting with BALN inflation and interest charged to bnUSD borrowers
Since bnUSD can be minted with other approved stablecoins (e.g. USDC), you can think of the bnUSD savings rate as a way to attract more stablecoin holdings to Balanced. Basically, it increases demand for bnUSD relative to non-yield bearing stablecoins. The higher the savings rate, the more demand for holding bnUSD. It’s comparable to what the federal reserve is doing when raising interest rates. It increases demand for holding USD.
The bnUSD savings rate will work similarly to a combination of sICX and bBALN. Similar to sICX in that redemption value will increase as more bnUSD (and potentially other tokens) are added to the bnUSD Savings Rewards pool, and similar to bBALN in that staked bnUSD will be locked.
The bnUSD savings rate can be funded by any number of sources, however, the initial source of rewards will be from two places:
1.) BALN inflation
2.) Interest charged to bnUSD borrowers
- bnUSD borrowers will start to pay interest
- Interest rate is adjustable
- Amount of interest going to savings rate vs fee earnings will be adjustable
The interest charged to bnUSD borrowers will accrue linearly and ideally compound at every interaction with the loans contract, but @Andell let me know the best way to design this. I imagine a totalDebt variable that increases each time a user interacts with the loans contract, while each user position will have a shareOfDebt variable (or some kind of non-transferrable LP-style token representing their share of the debt pool).
The interest rate borrowers pay will be adjustable by the DAO. The amount of interest redistributed to the savings rate vs. being captured by fees for the DAO is also adjustable.
A key objective of this initiative is to gather RWAs (“Real-World Assets”) as collateral for bnUSD, then earn revenue for Balanced via the interest earned. As an example, according to this Dune dashboard as of September 19th 2023, MakerDAO has over $100M USD of annualized revenue from interest earned from RWAs. A portion of this revenue can then be used to pay a higher interest rate to staked bnUSD.
I’d like to propose the following initial parameters:
Borrower Interest Rate: 2%
Allocation to Savings Rate vs. Balanced Fees: 100% vs 0%
Modification to Origination Fee: change to 0.2%
I’m looking forward hearing any feedback and to seeing this proposal become a reality, I’ve been thinking in this direction for quite some time. MakerDAO has shown the path forward to increasing revenues in a high interest rate environment, and Balanced has all the capabilities to quickly follow-suit.
The next step after discussing on the forum is to begin implementation of the bnUSD savings rate and changes to the loans contract to support ongoing interest. From there, we would do an on-chain vote to upgrade the contract logic.
From a timing perspective, I wouldn’t want to activate this feature on main net until ICON has good access to USDC through the xCall service. This should come with the main net deployment of the Archway IBC connection, as the Cosmos Ecosystem recently received native USDC.