Update: $NETT Borrow Rate Analysis
Over the last few days, some $NETT borrowers have been reporting that the rate at which borrowings have been rising is higher than what is shown in the UI.
Note that the rates on UI have already been close to 1500%.
We have been investigating these reports, and there seems to be a combination of fluctuating block times, extremely high utilization, and an error on the UI creating issues in terms of APY vs APRs.
First, the good news is that this issue impacts only the NETT market borrowers in a material way. While it most likely exists on other markets as well, the impact on those is negligible and can be ignored safely.
This is primarily due to the very high utilization of the NETT market, which had been consistently hovering around the 100% mark.
While we can’t control the reasons users have been choosing to borrow, the only way to increase liquidity is to impose a cost on the borrowers until the economics work against them.
To that effect, we started increasing the rates on the NETT market.
Note, that we do not target a specific rate in real time.
The rate is completely based on demand and supply.
Secondly, the issue is the typical formulas of simple and compound interest in particular do not work as readily in the context of how a money market functions.
The system is both asynchronous and user input driven, there is no bot that runs periodically. This means that there is no set frequency at which compounding occurs; this limits the accuracy of APY estimations.
APR and APY differentiate significantly at high rates.
The rates seen on NETT have probably not been experienced on any other money market that has significant TVL.
At rates below 20% they are fairly close to each other, but anything above 50% and the deviations start increasing —the deviations grow even larger as the rates go up.
AGORA is a replica of Compound, which means the errors they have probably exist in our versions as well. The difference is that Compound never had a market with such high rates, and most of their markets would have APR and APY very close to each other. Compound displays the real time rates as APY when it should be APR (this is being verified.)
While there are some other issues around block times and compounding frequencies, the crux of the issue is how APR vs APY is displayed.
Users were being shown APR in the APY figure. Note that we are still running tests on this, but this seems to be the most likely scenario.
We are going to make changes to show the APR figure on the UI.
The contracts did what they were supposed to do, and even on the UI the actual balances shown were always correct even in real time. The APY rates displayed however should have been APR.
Borrowers who did not monitor their balances would suffer, on the flip side, lenders were making far more than what was shown in the UI as well, which should more than make up for the lack of liquidity seen over the last few days on the NETT market.
The adverse outcome is only to NETT borrowers who did not monitor their balances, all other users were unimpacted and some (NETT lenders) got more. This number is a very small minority of the total.
We are a fair launch protocol with no team allocation and no VC funding. All DeFi applications carry risk, and while we endeavour to reduce them, the usage of the platform, including the UI, is at each users own discretion.