Liquity - Why Are User-set Rates a Game Changer for Borrowing?

thanks a lot hello everybody um yeah let's go and let's talk about user set rates and why I think they are a game changer in borrowing but first of all I will also cover three facts about borrowing in defi not really a lot of people talk about so bear with me point three will shock you you're used to this attention grab actually I'm fine I shouldn't fall out of the stage I shouldn't freeze yeah I think I don't need it thanks cool um yeah thanks to the intern honor social media intern that made the slide so don't blame me if you don't like the slides and before we start why do we care about defi why I'm excited to build Solutions in defi for me these are these three principle Financial Freedom I want to control my asset um and I want to freely access them and the tooling self sovereignty nobody should decide on my behalf nobody should change the rules and Market driven I want open market solutions that are owned by users so with that lens let's look at borrowing in defi especially CDP systems and their rates so kind of that's the first fact and some something I really like look how diverse the right setting rate setting is today we have makers maker rates are set by governance so that's more alike like the FED bunch of people come together set the rates we have curve rates are set by algorithms so by pool utilization along the bonding curve this has the implication that they can be um unpredictable and very volatile we have liquid1 we have no interest rate a oneoff fee um in a high interest rate environment that isn't very Capital efficient so we have a great diversity but all of them have some disadvantages so that's why we thought how can we improve that how can we improve rate settings in borrowing Defi and then we had the light pul moment why we why don't we let the user set rates so welcome to user set rates what does it mean every user can set the rate and change at any time so in essence you borrow on your terms on your own terms the borrower is not anymore a rate taker but a rate maker and everybody has a different rate let's look how that oh and this means hey the the user is in the driving seat good let's look how that works um and what's the catch first of all let's look at CDP stable coin systems and and the speakers before have told that I think of CDP stable coin systems like Landing markets on the borrower side you have somebody that takes out a loan in the stable coin against the collateral and uses it on the other side you need somebody that holds the stable coin if nobody holds it then we have a problem if the system is not in an equilibrium we have a problem how do we see that we see it in the pack and we've seen it recently with a lot of stable coins when trfy yields came in when EA yields came in people didn't hold the stable coin and went to other yield sources then it deed so I think for a good CDP system it's essential that we can have this equilibrium state and how do we get an equilibrium we know that also from nature kind of blood pressure all these systems work like that you need direct feedback loops and you need strong incentives you need carrot and sticks so carrot is easy incentive interest rates but I think what is also often missing is the stick how can for example holders say to the borrowers hey I think you're paying me not enough and if you don't do that I want to will dump your stable coin so what's the stick here wow the quality is really bad um the stick or redemptions that are tied to the rate that is something we already had in V1 redemptions let me quickly explain what redemptions are and that's actually the second fact redemptions allow every stable coin holders to redeem Direct to the underlying asset without friction and interestingly enough that's almost liquid and liquidity like system are almost the only one that allow that kind of in a full way to access the liquidity below so you go with your stable coin and you redeem the underlying Eve collateral you swap it the borrower doesn't make a loss in that moment it just loses the exposure to Eve so if you have let's say 98 cents bold by the way is our new stable coin name if you have bold for 98 98 cents you can go to the protocol and get one um dollar worth of if how does that tie now to the rate setting very simply as I said we tied redemptions to the rates so now if the stable coin is below PC stable coin holders can go to this side and redeem their stable coin against which collateral against the Trove owner or the borrower with the lowest rate what will that trigger with borrowers that don't want to get redeemed they need to increase the rate so now you see the game of user set rates and how that works and what's also a bit the catch behind it uh let's look at an example how that works if the peg is below now borrow fear to get redeemed what do they do they increase rates and because in V2 and that's important all the the interest is going to the holders this increases the yield for the holders they more likely hold it um or buy it and the price goes up if the peg is above then it's quite uh easy for the borrowers they are not afraid to get redeemed nobody takes a bold worth one dollar two cents to get one dollar worth of Eve so they say hey I'm paying too much obviously it's above pack we have a very good signal that we are probably above the market rate so I will decrease my rate the flow of interest is decreasing to the holders they might not get enough they withdraw and sell price goes down so we have this equilibrium system with strong carrot and sticks so where is the Shocker where is fact three we we're getting there bear with me um because I mean what I learned on this journey it's all about the interest rate flow and the interest rate setting if you building a CDP stable coin and I think that was very revealing to look at existing systems and actually how different they are I didn't realize before and I'm not sure if you're aware of so let's look at them how are existing cdb sa coins dealing with that make a die interesting we have a direct interest flow into s die so that's very good a direct feedback loop then the rate setting is done by governance so there you're introducing somebody that needs to know being an expert what the right rate is all ago we we it mentioned it does revenue it goes to the Dow it can go anywhere it can go to the holder and they reinvest most of it and we know why to have the equilibrium and the rate setting is also with governance so it's rather governance heavy then we have curve USD also interesting rate setting is algorithmic and the flow that was the most surprising it's totally decoupled I don't know if you're aware where do the revenues go from the borrowers they go to the VA CRV holders and then it's really on them or kind of on their um uh yeah on their mood that they follow it back to the LPS but there's no direct flow enshrined in the protocol which I found really uh surprising if you look now with that lens on kind of the model we are building with V2 I think you see that's really simple sound and Sovereign because we have a direct feedback loop nobody in between the rates go we funnel them from where they come the borrower where they should go to the holders and the rates are set by the user I think what's interesting that we don't introduce anybody in between so it's really a market driven solution and most interestingly if you look at it at that with V2 we tap in an unexplored um unexplored space of solutions nobody has really tapped into so I'm really looking forward how the system will work work on the rate setting we have curve that's algorithmic we're going to do it more user driven and we have more governance driven systems like go and die and then how is the rate flow we have this indirect system go in curve and the direct one maker and liquid V2 so I think that's also why I think this can be a game changer because it open UPS it opens up new opportunities and I think the biggest potential is that V too could become The Benchmark rate for defi borrowing because it's the closest to the market forces nobody intervenes nobody distorts the signals from the market this should allow us to um have a more and steady and predictable rate interesting fact is the rate for the first time should be forward-looking it's not reactive why because user who set the rate already anticipate will it be above P below pack how should I set the rate that I'm safe in the future and not I'm reacting to something that happened in the market in the past um it enables efficient borrow rate Discovery through this direct feedback it should tighten the spread for boing and Landing rates and and it allows to act actively manage borrow rates in a grandular way you have seen the distribution it's almost as an order book the rate function on the borrow side like an order book so what does V2 want to be for its users what's the benefit for the user and I think it's really to be the place to have predictable and attractive Market rates for borrowing and going back to the title why the does it matter why I'm excited it goes back to the principles I think V2 is very true to these principles why I came into the space first it's a system that only adheres to its users it's Crypt native immutable and a solution without ties to threy and the most important one and we have seen that in the two to 2 by two consultant Matrix uh there's no need for intermediary alas or governance to determine the right rate because as I said it's all about rate flows and who's setting the rate I think that really opened my eyes looking at the different solution and I think that makes me excited because we're uh leveraging the strength of defi doing actual defi with that I believe we are building the most Market driven and deting building block for a CDP based borrowing stable coin Solution that's why we Deploy on Main net or very restrictive if the asset that's why we think it's a good solution for other ecosystems that want to have a native stable coin uh and it's very well suited for that so that's the part about user interest set rates which is the core innovation of V2 there are other things which we introduce new collateral types uh higher realizable loan to value we get rid of the recovery mode and I think a very interesting one The Sovereign stable with real and predictable yield like the crypto native savings account and another Point protocol incentivized liquidity the protocol making sure there is some liquidity something you also see nowhere else yeah I think with that it would be uh if I got you interested we have a lot of materials follow us on Twitter go in our blog post there is a white paper out that outlines the whole idea and much more we love to get in touch that's the Discord link the Twitter link give us feedback challenge us um at the end we want to build the best product possible um also get in touch with Max he's over there if you want um to use such a model for your own project um and by the way there there's a lot of the liquid team here we have our Retreat here here so they they are well well marked take the chance and talk to them and I think with that I really think you us a set rate are in uh your best interest thanks