Summary
Starting Monday (6th of January 2024), we will remove (or substantially raise) the existing utilization_rate_cap_pct on SOL borrows. This cap was originally put in place to keep borrow rates below a certain threshold and create a predictable environment for leveraged (“Multiply”) positions. However, as staking yields (e.g., via JitoSOL) have risen and the market has evolved, this parameter is now creating a form of “price fixing” that artificially limits borrowing demand, stagnates new supply inflows, and prevents the market from finding its natural equilibrium. By removing the cap, we aim to return to a free-market rate determined by real supply and demand.
Background
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Why the Cap Was Introduced
The utilization_rate_cap_pct was added when we noticed many users borrowing SOL primarily to stake it in liquid staking tokens (LSTs) like JitoSOL, which was yielding around 10%. To ensure those leveraging this carry trade wouldn’t face rapidly rising borrow costs, the protocol set a strict utilization cap. This effectively limited how high the borrowing rate could climb, making Multiply strategies easier to maintain without sudden interest spikes. -
Why It’s Now Being Changed
Over time, LST yields have grown, and demand for SOL borrowing has diversified. The cap is now preventing users willing to pay higher rates from accessing liquidity; it also deters new lenders, since they can’t earn higher yields that a fully open market would otherwise deliver. We’ve effectively set an artificial ceiling on utilization and interest rates, which runs counter to the healthy feedback loop of a free market.
What This Change Means
- Free-Market Borrow Rates
By removing the cap, borrow rates will once again respond to genuine market conditions. This can lead to higher rates when demand is strong (especially if staking yields continue to trend upward) but also ensures that no borrower is “locked out” by protocol-imposed ceilings. - Open Access for Borrowers
Potential borrowers who have been blocked under the old cap will now be able to tap into the SOL pool, potentially pushing utilization higher and rates up. This increased competition for liquidity could, in turn, attract more lenders seeking better yields. - Natural Equilibrium
The primary benefit is restoring a market-driven equilibrium. If rates become too high, borrowers may pay down debt or not initiate new borrows; if rates drop, more borrowers can enter. This cyclical dynamic is what fosters a sustainable and mature lending ecosystem.
Trade-Offs
- Impact on Existing Multiply Positions
Some users set up leveraged strategies at artificially low borrow rates. With free-market pricing, these rates could rise above initial expectations, potentially reducing the profitability of ongoing trades. While this will be an adjustment for current borrowers, it aligns with the standard risk/return profile of most decentralized money markets. - Increased Rate Volatility
As the protocol reverts to a more fluid interest rate model, rates may fluctuate more rapidly in response to changes in total supply or unexpected withdrawals. Borrowers and lenders should be prepared for potential short-term volatility in interest rates. - Long-Term Sustainability
Despite the near-term inconvenience for some, the removal of the cap promotes a healthier market in the long run. By allowing new borrowers to compete and lenders to earn a higher return when demand spikes, we create stronger incentives for liquidity and reduce the risk of “liquidity lock” situations.
Next Steps & Timeline
- Implementation
The removal (or significant increase) of the utilization_rate_cap_pct for SOL will take effect on Monday. All impacted users are encouraged to review their positions and prepare for possible rate increases. - Continuous Monitoring
We will closely watch how SOL borrowing behavior adapts to this freer market environment, examining changes in utilization, interest rates, and total liquidity. If further parameter tweaks—such as adjusting the slope of the interest rate curve—are needed, we’ll communicate those decisions transparently. - Ongoing Updates
As this change unfolds, we’ll share data and insights to keep you informed. Our goal is to ensure a well-functioning protocol where borrowers and lenders alike can confidently participate under naturally determined market conditions.
Conclusion
By allowing SOL borrow rates to be set by actual demand and supply, we move toward a more open, adaptable, and robust lending market. We appreciate the community’s patience and engagement throughout this shift. Please stay tuned for additional announcements as we monitor the market’s response and continue to refine our protocol parameters.
Thank you for your continued support and participation!