This publication proposes revising the Debt Interest Rate from 1% to 2% on Prisma Finance.
Abstract
This publication proposes increasing the Debt Interest Rate parameter from 1% to 2%. A strategic opportunity has presented itself to increase protocol revenue without materially impacting risk, in this period of high emissions where the DAO can reduce the effects of high emissions with a higher earnings rate. This publications aims to further finetune the interest rate on Prisma Finance.
Motivation
The current high emissions on Prisma Finance have provided an opportunity to build a treasury for the DAO. Reserves serve as the rainy day fund for protocols. Over time, they may also be used to fund initiatives, reducing the reliance on the native token treasury. Moreover, interest rates can be used opportunistically to capture increased reserves when specific market conditions are met.
NOTE: The proposed change, in my opinion, seems to capitalize on a few whales who are getting insane rewards in this high-emissions launch period. I assume that developers did not expect such a TVL boom and thus didn’t plan for this change initially, but that’s just my guess. Even with this change and price being lower than at launch, depositors are still very much happily earning huge rates, so a bit of a shave-off doesn’t seem to materially impact their strategy.
However, such cases in the future shouldn’t be done too often, because predictability of rates is something users value, and it should be maintained well.
Specification
Update the Debt Interest Rate as followed:
Parameter
Current Value
Proposed Value
Debt Interest Rate
1%
2%
Next steps
Welcome feedback and aim to put up snapshot on 2023-11-05.
I don’t understand the purpose of increasing the interest rate at this juncture shortly after launch and just putting up the 1% interest rate a week ago.
If anything I think Prisma should be pressing its competitive advantage by lowering or even removing the interest rate (I am not convinced the 1% was even needed) and thus I think it would be a mistake to raise the interest rate to 2% right now (this will just encourage competitors to undercut prisma, argubaly already a problem with the 1% interest rate).
Prisma has gotten off to a super hot start, I think it should put its foot on the growth gas and continue where it is now, or even considering lowering the interest rate to 0.5% or 0% to ensure it can stay in the lead on growth before competitors inevitably start eating away at it’s TVL lead.
Prisma is already growing the reserves nicely both through the 1% rate that currently exists, mint fees, and of course early unlock fees from those claiming their prisma.
I also think its bad practice to be changing parameters like this so early on when a number of folks just entered the ecosystem and took out loans for an advertised 1% rate + mint fee, at the very least I think the current parameters should remain the same for at least a few months and then re-evaluate from there. Nothing is worse for a new lending product like this then to gain a reputation of changing parameters all the time early and often (such constant tweaking has been the downfall of at least a few other LST based lending protocols over the last year).
I would vote against this right now and urge other members of the Prisma community to do so as well. Prisma has had an amazing launch, lets not tweak important parameters like the interest rate so early when its nots necessary to do so.
I think this is worth trying at least for a few weeks while emissions are high. Prisma has the highest LST yields right now so capitalizing on that for the future of the protocols and holders makes sense. Borrowing remains very competitive.
Even if we decide to reduce it in a few weeks then it makes sense.
This is definitely a fair point, as changing parameters too often isn’t predictable behavior a user would want to see necessarily. However, de to high emissions and yields (still) the ape tax can maybe even be temporary. Overall, understand the sentiment, is fairly subjective hence up to a vote. I’ll abstain from voting in this case to see how miners and participants think on this topic.
Given the incentives, borrowing would remain competitive at a 2% interest rate; nonetheless, this proposal seems reactionary at best, given the latest update to 1% at launch. Changing terms for borrowers shouldn’t be taken lightly, as a volatile governance process undermines trust in the platform. Should this proposal be restructured to integrate a fee switch for vePRISMA holders, it would still capitalize on the current premium paid to borrowers through emissions while simultaneously offsetting the inevitable price depreciation due to the highly incentivized TVL (even if one disregards the current boost factor). By doing so, the increase in the interest rate becomes justifiable, and it breaks the current circular tokenomics by introducing revenue-based demand that establishes a soft floor for the token price. This ensures that Prisma remains able to maintain the attractive APRs that are required to avoid TVL outflows.
Proposed modification:
Update the Debt Interest Rate from 1% to 2%;
Activate the fee switch for vePRISMA holders, subsidized through the proposed increase in the debt interest rate;
Core goals:
Token Holders: Provide incentives for PRISMA demand and establish a soft floor for the token price;
Borrowers: Retain TVL by stabilizing the decline in APRs due to the current high emissions and lack of demand for the token;
Overall, this adjustment makes the whole proposal far more palatable and justifiable for Prisma’s long-term sustainability.
Current debt cap without any analysis of long-term impact of supply and demand, risks, and other motivational factors – such as synergystic relationship with crvUSD, mkUSD depth, stability, and adoption, u/k sentiment of borrowers***, support for immaterial effect to risk (or even identifying which risks youre referring to, competitive pressures and borrower alternatives (LUSD, DAI, etc.)-- feels like a big ask relative to the information provided.
***This vote closes before early adopters and borrowers receive any meaningful allocation of $prisma and thus have no real say in this manner. It seems wholly inappropriate and a breach of trust to hold this vote at this juncture – we really gonna pullback the DAO facade already? – with such little analysis on the economic rationale beyond unsupported claims of more “revenue” over unknown timelines with unknown risks. Doubling a rate seems well beyond the bounds of “finetun[ing]” the interest rate, which should trend in something other than 100bps swings.
My delta neutral price risk is stETH interest less $mkUSD borrow cost. You’re shaving 25%+ here and such a move at this time in this manner for a new stablecoin feels presumptuous, at best.
Why is there already a snapshot vote going on for this? The governance process states that should not start until at least 2 days after the initial RFC is posted I believe?
“Phase 1: Request for Comment (RFC)
Timeframe: 2 days
Form: Governance Forum Post
The first phase of the governance process is meant to allow the community to digest a proposal, comment, and ask questions about a particular proposal.
To post a RFC, label your post “RFC - [Your Title Here]”. Prior to moving ot Phase 2, give the community at least 2 days to read and comment on the RFC. Please respond to questions in the comments, and take feedback into account in the next iteration of the proposal posted in Phase 2.”
Unless I am missing something - this proposal has pre-empted the governance process by going straight to phase 2 almost immediately after the initial rfc post?
Seems like you should take down the snapshot poll and start it again in at least 36 hours from now @ivangbi ?
a process question on this proposal
Seems like you should take down the snapshot poll and start it again
The snapshot is not by me, I assume it was added by governance coordinators. The quick jumping through process is not customary, but I have seen it sometimes happen in other DAOs when a topic is urgent. Given that the effects of the proposal are likely short-term due to high temporary emissions, I understand why they would see the benefit of having the vote done asap. After all, a vote is a vote.
In my experience with Gearbox DAO (and in general) this is not ideal but overall the voters ARE able to vote against if they really want to maintain the process or disagree with the proposal.
UPDATE: have added more context into the starting text.
Agree (please see my reply above), an you gave an interesting twist to it. I am not sure what the switch plans are actually, but of course would be interested in seeing it as well. Could it be as a follow-up?
Overall speaking, I am probably not a user that contributes a significant amount of revenue to the DAO. Ideally I would be a long-term borrower at Prisma. Changing interest rates always forces me to have the liquidity available and not park it in not so easily liquidateable assets (Which I actually want to do and am looking for a product on the market. Deposit LSTs, borrow stable with low and fixed interest - I might be a minority of users who are looking for such a product.)
Regardless of my opinion overall I think iterating with the borrow rate is valuable, as long as the experimental data is being taken into account for further decisions.
Okay, good to hear that it wasn’t you who decided to skip ahead in the governance process @ivangbi , but in some ways its even more concerning if this was put up and skipped ahead by one of the team.
I think its really important that early proposals follow the stated governance process (which the team created!) as this sets precedent for governance actions early on. To just willy nilly skip ahead in the process on proposal #2 of the DAO is really bad practice (and if the team thinks the process is too long/burdensome then lets see a governance proposal to update the process, the team created the process afterall!).
I would urge all prisma DAO members, regardless of what they think on this particular proposal, to support and make sure we are following the governance process as it is laid out and not set a bad precedent from the get-go that the process can be bypassed whenever someone feels like it.
Based on this I am still urging and hoping the current snapshot will be deleted, and will be put back up in about 24 hours as dictated by the governance process.
