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Pseudo-Fixed-Interest-Rate Model

an optimized interest rate model for Stable Pools & Liquidity Staking Token(LST)-pegged Pools

Background

In a typical LYF structure, users borrow assets from a built-in lending pool to engage in leverage farming, accepting exposure to the funding cost with a floating interest rate. For volatile pools like OP-USDC, where the fundamental farming APR is relatively high, borrowing interest rare can be tolerated as the resulting leveraged farming APR remains appealing. However, for stablecoin pools and LST pegged pools, where the farming APR is lower, borrowing interest becomes a crucial factor for farmers when deciding to open positions. The volatility of interest rates presents challenges for liquidity providers, resulting in low leveraged APRs or even negative APRs. This limitation hinders the potential of LYF and may reduce borrowing demand.

Pseudo-Fixed-Interest-Rate (PFIR) Model

To address the aforementioned problem and unlock the full potential of LYF, Extra Finance introduces a new supply-demand model called the Pseudo-Fixed-Interest-Rate (PFIR) model. Let’s explore how it works for stable pools and LST pools.
  • The PFIR model functions similarly to a fixed borrowing rate mechanism until it reaches a utilization threshold, such as 80%. Users can leverage their stable/LST pools with a fixed borrowing rate below the threshold. As the fixed borrowing rate is intentionally lower than the farming APR, it becomes profitable to borrow for leverage farming, resulting in high utilization.
  • With high utilization, lenders can benefit from an attractive lending APR calculated based on utilization and borrowing APR. This ensures lenders can enjoy a steady APR rate that surpasses typical lending protocols.
  • Once the utilization hits the threshold, the borrowing interest rate dramatically increases, encouraging borrowers to repay or attracting lenders to deposit funds. This design also creates a buffer for lenders to withdraw their deposits whenever they want.
  • To enhance the user experience for leveragers and minimize the risk of negative farming APY due to high borrowing costs, ExtraFi App has implemented a limit on borrowing (or leverage), when the utilization of the lending asset reaches 81%. This measure ensures that leveragers have a reduced chance of encountering unfavorable APY rates.
An example of the PFIR model is as follows:
Note that the value '5%' - fixed borrowing rate in the above chart is subject to market conditions and borrowing demand, and this value will be regularly reviewed and updated through a governance procedure.

Benefits of the PFIR Model

For Farmers:
1/ Isolated lending pools for stable/LST pools ensure a comparable low borrowing cost by design.
2/ Predictable borrowing costs when implementing leverage farming for stable/LST pools, avoiding negative APRs and uncertainty.
For lenders:
1/ More sustainable lending APR. The high demand resulting from high utilization allows lenders to enjoy a steady, attractive APR rate compared to traditional lending protocols.
2/ A buffer is designed for lenders to exit their lending positions at any time.
3/ As borrowers provide liquidity in stable or pegged LST pools, the risk of bad debt resulting from market volatility is much lower compared to ordinary volatile pools.