{"aip":26,"title":"Raise Maximum Interest Rate on AMPL Market","status":"Proposed","author":"Ahmed Naguib Aly (@ahnaguib), Nithin Ottilingam (@nithinkrishna), Brandon Iles (@brandoniles)","shortDescription":"Raise maximum interest rate to better balance incentives between the borrow and deposit sides of the market.","discussions":"https://governance.aave.com/t/arc-raise-ampl-maximum-interest-rate/4996","created":"2021-07-26T00:00:00.000Z","preview":"## Simple Summary\n\nThis proposes raising the maximum AMPL interest …","basename":"AIP-26","description":"\n\n## Simple Summary\n\nThis proposes raising the maximum AMPL interest rate to better balance incentives between the borrow and deposit sides of the market.\n\n## Motivation\n\nFollowing [API-12](https://governance.aave.com/t/proposal-add-support-for-ampl/854/8), [AMPL borrowing & depositing](https://app.aave.com/reserve-overview/AMPL-0xd46ba6d942050d489dbd938a2c909a5d5039a1610xb53c1a33016b2dc2ff3653530bff1848a515c8c5) went live on the AAVE v2 market [date=2021-07-24 time=20:22:00 timezone=\"UTC\"].\n\nSince then, there has been a near 100% utilization rate of deposited assets. This suggests the maximum cap of the interest rate curve is not able to reach a high enough value to effectively balance incentives between the borrow side and depositing side of the marketplace.\n\n![Deposit and Borrow APY on AAVE, 7/24/21](../assets/AIP-26/apys.png \"Deposit and Borrow APY on AAVE, 7/24/21\")\n\nWhile the AMPL spot market is currently in a relatively extreme condition, the AAVE borrowing market should be able to perform efficiently in all market scenarios.\n\n## Specification\n\nWe suggest the following parameters for AAVE's default [interest rate model](https://docs.aave.com/risk/liquidity-risk/borrow-interest-rate#interest-rate-model):\n\n- Optimal utilization = 75%\n- Slope1 = 2%\n- Slope2 = 10,000%\n\nThis leads to a piecewise linear curve with two parts and three defining points:\n\n- Borrow Interest(0) = 0% APY\n- Borrow Interest(75) = 2% APY\n- Borrow Interest(100) = 10002 % APY\n\n## Rationale\n\nA higher cap of the borrow interest rate will allow the marketplace to have a more sustainable equilibrium.\n\nSince this will result in overall higher fees coming into the system, in tandem we also suggest lowering the reserve factor from 20% to 10% to incentivize more depositors. This would be submitted as a separate AIP to decouple these two decisions.\n\nWe believe a nonlinear interest curve is healthiest long-term and could likely be used by many other assets as well, however this work can be discussed more in the future.\n\n## Implementation\n\nA deployment of the existing implementation of the Interest Strategy will be used, with the following parameters:\n\n    optimalUtilizationRate: new BigNumber(0.75).multipliedBy(oneRay).toFixed(),\n    baseVariableBorrowRate: new BigNumber(0).multipliedBy(oneRay).toFixed(),\n    variableRateSlope1: new BigNumber(0.02).multipliedBy(oneRay).toFixed(),\n    variableRateSlope2: new BigNumber(100).multipliedBy(oneRay).toFixed(),\n\n[https://etherscan.io/address/0x509859687725398587147Dd7A2c88d7316f92b02#readContract](https://etherscan.io/address/0x509859687725398587147Dd7A2c88d7316f92b02#readContract)\n\n## Copyright\n\nCopyright and related rights waived via [CC0](https://creativecommons.org/publicdomain/zero/1.0/).\n"}