With the recent success of AMPL breaking multiple records on AAVE, I would like to open the discussion on negative interest rates for AMPL on AAVE. I’ve spent quite some time thinking about it and I believe there are many beneficial points to the rates being able to go negative.
In the last couple weeks, we have consistently seen 100% utilization due to borrowers having to pay less interest on their loans than they made with holding their AMPL through the strong positive rebases. This was actually expected to happen and is still part of a functioning market.
What happens though once AMPL enters into a period of prolonged negative rebases? Wouldn’t borrowing demand dry up to not be exposed to negative rebases? At least this is what happened between August and Mid September, where AMPL was mostly having negative rebases and utilization on AAVE mostly stayed at below 10%.
Ideally in my view, similar to how positive rebase time periods lead to an increase of borrowing demand and a lending supply crunch, there should also be an increase of lending supply with cheap credit happening during negative rebase periods.
Now that we have entered negative rebase territory again, we will see how that second part is going to play out. If the market is going to repeat the behavior during August-Mid September, we will quickly see utilization fall to below 20/10% again.
While in that environment we might see some growth in lending supply from lenders who want to reduce their rebases by a little bit, I believe we could achieve a much stronger growth of the AMPL lending market if that utilization was not 10-20%, but more around 40-50%. Supply would increase at a much faster rate, ultimately leading to a quicker adoption of AMPL as a global reserve currency.
So how can we increase utilization during negative rebase periods? With negative interest rates!
My thoughts are, if there was the option for the interest to go negative below a certain utilization (I think 50% might be interesting), I think the following would happen:
- There would be a demand from borrowers who want to profit from having to pay back less, maybe by selling AMPL into other stables or buying stuff
- And even more interesting, there would now also be a higher demand from borrowers who plan to hold AMPL longterm. (Ex: Borrow 100 AMPL, rebase -3%, interest -1%, They have 97 AMPL now but only owe 99 AMPL effectively only having -2% rebase)
- There would be a bigger incentive to supply AMPL by lenders during negative rebases, due to higher Utilization% coming from borrowers
- And AAVE is still making money by the difference in negative interest rates for borrowers and lenders. (Especially when reaching the negative interest cap, giving a similar high revenue for AAVE as we've seen with the positive interest cap)
I just can only see win-win-win for everyone.
There would be a cap on how far the negative interest % can go, same as there is now with positive % rates. So during times of very strong negative rebases, lenders of AMPL can make money similar to how borrowers can do that during strong positive rebases.
I also have put some thoughts into how high/low the interest cap should be. Using a yet-to-be-determined high/low percentile would result in a different cap for negative and positive interest rates.
I’m very interested in hearing your thoughts about this idea!