Open discussion on Sturdy v0.2
In the month since Sturdy has launched, we’ve seen incredible growth. At the time of writing, Sturdy has nearly $18m TVL and is the largest Fantom-native protocol with no token.
Now that we’ve had some time to watch our new lending model play out, we’d like to identify two key areas where we can improve and discuss the paths forward. We’ll be discussing the two proposals outlined over the next week in the v0.2 channel on Discord.
Challenge 1: Maintaining supply-side liquidity
On April 20, one user borrowed all liquidity in the USDC, USDT, and Dai pools. At the same time, Yearn APYs for FTM (the most commonly used collateral asset) fell, reducing yields for depositing stablecoins. As a result, there was little incentive for users to repay their loans or deposit stablecoins. This problem is likely to occur again without a mechanism for discouraging borrowing at high utilization.
Challenge 2: Incentivizing high-yield collateral assets
On Sturdy, yield for lenders is based on staking the collateral provided by borrowers. Borrowers can deposit a variety of different collateral assets, each generating different amounts of yield. When borrowers provide collateral assets that generate more yield, lenders earn higher APYs. However in our current design, there is no incentive for borrowers to provide higher-yield tokens.
Proposal 1: Interest rate curves for high utilization paired with token incentives
The first solution involves introducing interest-rates when the utilization rate (the percent of deposited funds that are borrowed) falls above a certain threshold. The interest rate would be linear: the more utilization rises above the threshold, the more interest rates increase. This is the solution that the team implemented following the illiquidity previously mentioned, and is currently live.
To solve the second challenge, this proposal would involve providing token incentives to borrowers based on the amount of yield their collateral generates.
- No migration required
- Loans would almost always be interest-free
- Maintains differentiated mechanics
- Requires token incentives
- Restricts collateral assets to tokens that can earn strong yield (somewhat limited, especially on Ethereum mainnet)
Proposal 2: Let borrowers keep the yield from their collateral
Under this proposal, Sturdy would adopt a more typical interest rate curve similar to Aave: borrowers pay a variable rate based on utilization that increases more dramatically above a certain threshold. Borrowers would keep the yield from their collateral, meaning that lenders would only earn interest based on what borrowers paid.
This solution unlocks new possibilities, for example:
- Listing multiple yield-bearing tokens for the same base asset (e.g. yvWFTM and sFTMx)
- Enabling users to borrow assets other than stablecoins
- Allowing users to open leveraged farming positions (e.g. providing yvWFTM, borrowing FTM, and looping)
Under this model, Sturdy would be similar to other lending markets but with a focus on using interest-bearing assets as collateral (similar to how Abracadabra shook up the CDP space).
- Lower smart contract risk
- Can list any collateral asset regardless of how much yield it generates (for example yvBTC)
- Enables new strategies
- Mechanics would be less unique
- No more interest-free loans
- Would likely require a migration
We’re grateful for the incredible support we’ve received to date and are excited to get feedback from the community on how we can make Sturdy even better!