Announcement: Removal of SOL Utilization Rate Cap in the Main Pool

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

  • 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

  1. 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.
  2. 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.
  3. 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!

2 Likes

Summary

Allez Labs agrees with the proposed change the SOL reserve in the Main market, we suggest this should also be coupled with updates to its borrow curve in order to incentivize sufficient liquidity for potential long SOL liquidations.

Motivation

During the past few months the growth of SOL reserves in the Main market has been constrained by a combination of utilization caps restricting additional borrows and an interest curve meant to keep the SOL multiply products profitable. The natural dynamic of interest rates increasing with borrow demand and attracting new suppliers being hamstrung by the utilization cap and below market rates at this cap has created deadweight loss that has come at the cost of suppliers and led to a downtrend in SOL supply (down 22% since end of October).

SOL multiply is the most popular product on Kamino’s Main market where it represents 99.4%+ of all SOL borrows. However it has often been fully subscribed over the past few months, most notably the last SOL borrow transaction on Kamino’s Main market was two months ago, on November 4th 2024.

By lifting the utilization caps and properly parameterizing the IR curves, we can achieve a free market based utilization equilibrium that would be reached by a feedback loop between suppliers and borrowers.

Considerations

In the Main market, SOL is heavily used as a collateral asset, securing over $165m in outstanding debt (98% of which is stablecoins). Ensuring that a significant SOL buffer is available to offload any long SOL positions in the case of adverse market conditions is a key consideration.

Long SOL positions

SOL debt collateralization

Main market SOL debt is nearly entirely collateralized by LSTs (99.6%). This is primarily driven by the multiply products on SOL which have been fully subscribed. Most notably, the last SOL borrow transaction on Kamino’s main market was two months ago, on November 4th 2024.

Data on SOL withdrawals

Taking into consideration main market SOL liquidations as well as SOL withdraws from depositors, we aim to maintain at least enough SOL liquidity to facilitate the top 1% most extreme outflows which is around 5% of the total SOL supply flowing out of the market (including liquidations).

Daily SOL net flows in the main market since September

Interest Rate Curve Updates

In the Main market, 99+% of SOL borrowing is from the multiply positions, where users leverage their LSTs to earn an enhanced staking yield. The profitability for these positions is primarily driven by the spread of LST yield and SOL borrow rate. As such we anticipate active participants will deleverage their positions/new users will flow in when the spread is heavily skewed in on direction or the other.

Thus, the IR curves we are proposing are important to facilitate this behavior and will be updated as the market and LST ecosystem evolves.

Currently, average epoch-long yields for SOL LSTs have settled to between 8 and 11%. The market’s IR curve should facilitate borrowing SOL below these rates, while protecting against max utilization during periods of elevated actual or estimated yields.

Our suggested approach to setting the IR curves is parameterizing them such that utilization remains within a range of 85-91% based off current LST yields around 8-11% and SOL Multiply users’ sensitivity to rates. This would incentivise deleveraging/attracting additional SOL supply more aggressively as utilization moves beyond these soft boundaries. As the market continues to evolve we anticipate the need to update this curve and will be continuously monitoring the LST ecosystem and market conditions to make further recommendations when needed.

Specification

  • Adjust utilization_limit_block_borrowing_above to 99 for the SOL reserve in the Main market
  • Update the borrow rate curve for the SOL reserve in the Main market
Utilization Current borrow curve rate Current borrow APY Proposed Borrow curve Proposed Borrow APY
0% 0.01% ~0.01% 1% 1.2%
70% 4% 5.1% 4% 5.1%
85% - - 6% 7.8%
91% 6% 7.8% 10% 13.3%
93% 10% 13.3% - -
95% 20% 28.4% 25% 36%
97% 40% 64.9% - -
100% 80% 171.8% 80% 171%

N.B.: The conversion from borrow curve to apy is made using the assumption that the average slot time is around 450ms.

3 Likes

Is there any level of leverage in multiply or utilisation the main market we, as users, should be wary of from your modelling of the risk of making this change?

Thanks for the update, makes sense although time will tell how it plays out and impacts your TVL…

Can we please have clarity on whether there will be changed to the jito market utilization cap? I suspect you don’t want to make changes for either fear of liquidations given higher leverage capability or due to relationship with JTO - as they are still providing rewards to supply Sol, removing the cap would make Sol deposit rates potentially higher in jto market than main and therefore discourage Sol deposits that can be used for a wider range of kamino products…

Would appreciate any colour! Thanks