Lending & borrowing protocol Aave announced that it has rebalanced its TUSD stablecoin rate after the V2 rebalancing conditions were met.
In a Twitter post, the team urged users who borrow TUSD to check if the stable rate has been balanced and to switch to variable rates if they wish. The action was made by Aave’s smart contracts on January 4.
When borrowing assets in DeFi users have to focus on mitigating their liquidity risk. However, the process requires no action on AAVE as their smart contracts automatize it. AAVE often calibrates its main interest rate strategy to influence liquidity risks and optimize utilization.
How loan rate rebalancing works on AAVE
AAVE V2 changes interest rates for borrowing based on the utilization rate, which represents capital availability in a liquidity pool.
To incentivize further liquidity support and manage liquidity risk AAVE lowers interest rates when capital is available and increases them when capital is scarce.
As utilization rates near a point of 100%, it becomes problematic to mitigate liquidity risk. To improve upon their lending & borrowing system developers have created a complex mathematical model that encourages healthy loans. Users interested in the exact mechanism can read more about the interest model on AAVE’s official documentation page.
In the case of stablecoins, variable loans do not represent the best option given that their rates evolve constantly with utilization. Therefore it is a bad choice to use these loans for financial planning. Stablecoins are different compared to other assets on AAVE as their interest rate is maintained at issuance until specific rebalancing conditions are met.
For rebalancing stable rates to go up, a token needs to meet two conditions. First, stablecoins must reach a utilization rate of more than 95%. Secondly, it must have an overall borrow rate of less than 25%.
When a token meets both conditions, the V2 smart contract will rebalance the stable rate up. In the case of TUSD, it met the conditions on January 4.
No new development updates?
Have AAVE’s developers finally taken a break? This seems to be the case given that the team has not announced any updates since Christmas.
As Defiye reported earlier, developers announced the last update on December 24 when revealing a brand new design upgrade. But apart from that post, we have heard about no new announcements. Given that the AAVE token trends upwards, the lack of news is not bothersome for investors.
At the time of writing, investors price AAVE at around $117. The governance token enjoys explosive growth since the new year, jumping 50% in the span of a week. The token currently struggles to keep its bullish momentum but traders nevertheless believe that we might see a new ATH soon.
AAVE’s growth could potentially lead it to become the number one protocol in all of DeFi. Based on market data from DeFi Pulse, AAVE currently sits in second place in the decentralized finance leaderboard.
The lending protocol hosts $2.66 billion in liquidity with a daily increase of 7.45%. For AAVE to ‘topple’ Maker, it must attract almost double of the liquidity that it currently possesses.