The current dominant use of money markets like Compound/Aave/Cream is to match two types of people:
- Hodlers of a crypto asset like ETH who want to borrow stablecoins.
- Anyone who wants to earn yield on the stablecoin portion of their portfolio.
Some consequences of this pattern:
- The common element is stablecoins. We should make decisions that provide greater stablecoin utility to both groups. This could mean supporting more types of stablecoins, such as Curve’s yUSD or mStable mUSD etc. Or it could mean restricting protocol incentives to the stablecoin pools.
- Users are insensitive to yields earned on non-stablecoins. Their motivation is to use them as collateral to borrow, not earn.
- Users are sensitive to yields earned and interest paid on stablecoins. Suppliers want to earn a lot and borrowers want to pay a little, so that is a tension. The way to make both sides happy is to keep the utilization of the stablecoin pools near 100%, as this minimizes the spread between the supplied and borrowed rates. That means paying attention to the interest rate model and how users respond to the model, which might vary over time. We should be monitoring this and be prepared to modify the interest rate model as needed.