# \[NIP-88\] Update Prime Cash Curves

**URL:** <https://forum.notional.finance/t/nip-88-update-prime-cash-curves/200>\
**Category:** \[NIP\] Notional Improvement Proposal\
**Created:** [September 19, 2024, 7:39pm UTC](https://forum.notional.finance/t/nip-88-update-prime-cash-curves/200 "2024-09-19T19:39:13Z")\
**Posts on this page:** 1\
**Page:** 1

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**Author:** ![Notional\_Labs](https://yyz1.discourse-cdn.com/flex031/user_avatar/forum.notional.finance/notional_labs/32/28_2.png) [@Notional\_Labs](https://forum.notional.finance/u/Notional_Labs)\
**Post date:** [September 19, 2024, 7:39pm UTC](https://forum.notional.finance/t/nip-88-update-prime-cash-curves/200/1 "2024-09-19T19:39:13Z")

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We propose to change the Prime Cash interest rate models on Notional with the aim of enhancing deposit growth, optimizing utilization levels, and creating a more balanced interest rate environment for Notional’s users. Below are the details of the proposed changes and the rationale behind them.

### Proposed Changes

1. Increase target utilization levels (Kink2):

- Current Issue: The interest rates under the current kink are not sufficiently attractive to potential depositors. This leads to stagnant deposit growth and suboptimal utilization levels.
- Proposal: Raise the target (kink2) utilization levels to make the interest rate curves more efficient. Lower the kink1 utilization level to smooth the curves.
- Expected Outcome: Higher utilization targets will increase supply rates for lenders before rates exceed the kink, attracting additional deposits and improving liquidity.

1. Increase Kink2 rates in line with increased Kink2 utilization:

- Current Issue: The interest rates at the current kink are not sufficiently attractive to potential depositors.
- Proposal: Raise the target (kink2) rates to make it possible for interest rates to sit at sustainably higher levels (below kink2).
- Expected Outcome: Higher kink2 rates will make it easier to attract depositors in the event that attractive leveraged yield strategies produce additional borrowing demand.

1. Decrease the max rate for ETH:

- Current Issue: The existing max rate is overly punitive, causing highly negative APYs for leveraged yield users when rates go above the kink. This discourages participation without significantly aiding in risk mitigation.
- Proposal: Lower the max rate for ETH to more reasonable levels that still incentivize leveraged yield users to deleverage when necessary.
- Expected Outcome: A fairer interest rate environment that encourages sustained participation from leveraged yield users while maintaining effective utilization control.

### Rationale

- Borrower Behavior on Notional:
  - Unlike other lending protocols dominated by cross-currency borrowers, Notional’s borrowing activity is primarily driven by leveraged yield users.
  - These users are more responsive to spiking borrow rates and tend to deleverage quickly, reducing utilization organically without the need for excessively high max rates.

- Risk Considerations:
  - Cross-Currency Debt Exposure: Notional has relatively little cross-currency debt compared to its overall size (~85% of Notional’s open debt comes from leveraged yield strategies). The majority of debt stems from leveraged yield strategies, which pose less insolvency risk even at high utilization levels.
  - Collateral Concentration in wBTC: Any cross-currency debt is predominantly collateralized with wBTC. By maintaining a lower target utilization parameter for wBTC, we mitigate the risk of liquidation failures during market downturns.

### Risk Mitigation

While increasing kink2 utilization levels could theoretically reduce the pool of unutilized assets available for liquidations during price drops, the following factors mitigate this risk:

1. Limited Cross-Currency Exposure: The protocol’s minimal cross-currency debt reduces the potential impact of high utilization on liquidation processes.
2. Strategic Parameter Adjustments for wBTC: Keeping wBTC’s target utilization low ensures sufficient liquidity is available to handle liquidations if needed.

### Proposed Parameter Changes

| Parameters | ETH | Stablecoins | LSDs | wBTC |
| --- | --- | --- | --- | --- |
| Kink Utilization 1 | No Change | 80 → 75 | 70 → 55 | 65 → 55 |
| Kink Utilization 2 | 80 → 90 | 85 → 92 | 75 → 80 | No Change |
| Kink Rate 1 | 2.29% → 2.36% | No Change | 1.17% → 0.59% | 0.59% |
| Kink Rate 2 | 6.09% → 7.07% | 7.07% → 7.85% | 2.93% → 3.52% | 2.34% - 3.52% |
| Max Rate | 195% → 100.5% | No Change | No Change | No Change |

### New Parameters

| Parameters | ETH | Stablecoins | LSDs | wBTC |
| --- | --- | --- | --- | --- |
| kinkUtilization1 | 75 (75%) | 75 (75%) | 55 (55%) | 55 (55%) |
| kinkUtilization2 | 90 (90%) | 92 (92%) | 80 (80%) | 70 (70%) |
| kinkRate1 (1/256) | 6 (2.36%) | 10 (3.93%) | 1 (0.59%) | 1 (0.59%) |
| kinkRate2 (1/256) | 18 (7.07%) | 20 (7.85%) | 6 (3.52%) | 6 (3.52%) |
| maxRate25BPS | 192 (100.5%) | 192 (100.5%) | 225 (150%) | 225 (150%) |
| feeRatePercent | 20 (20%) | 20 (20%) | 20 (20% | 20 (20% |
| minFeeRate5BPS | 10 (0.50%) | 10 (0.50%) | 10 (0.50%) | 10 (0.50%) |
| maxFeeRate25BPS | 160 (40%) | 160 (40%) | 160 (40%) | 160 (40%) |

### Conclusion

By implementing these changes, we aim to:

- Enhance Deposit Growth: More attractive supply rates under the kink will encourage additional deposits, improving overall liquidity.
- Optimize Utilization Levels: Adjusted utilization targets will lead to more efficient use of assets within the protocol.
- Create a Balanced Interest Rate Environment: Fairer max rates for ETH and stablecoins will support sustained participation from leveraged yield users without compromising risk management.