Introducing Leverage Interest Rate to Incentivize Parrot Stability Pool

  • Stability pools to incentivize USDC and USDT liquidity for PAI
  • PAI interest rate to rise to incentivize USDC stability pool
  • The interest rate will be determined by the imbalance ratio of PAI:USDC in a stable swap pool.
  • A stable vault may have liquidation events if accrued interest dips the collateral ratio below 100.5%
  • The leverage interest rate adjustments will start on November 22nd
  • 2 weeks grace period until stable vaults liquidation is enabled on December 7th
  1. Introduce stability pools to specifically incentivize USDC liquidity for PAI
  2. The protocol will start charging a dynamic Leverage Interest Rate on PAI. These interests will pay the USDC depositors in the stability pools.

Leverage Interest Rate

On top of the base interest rate that Parrot is charging (currently 0.1% per year), the protocol will introduce a dynamic interest rate to pay for the leverage that the system is creating. A farmer may use PAI as a leverage instrument in the following way:

  • Deposit 100 USDC into Saber to get 100 SBR UST-USDC LP
  • Deposit 100 SBR UST-USDC LP in Parrot to mint 99 PAI
  • Trade 99 PAI for 99 USDC from a USDC:PAI trading pair
  • Deposit 99 USDC into SBR to get 99 SBR UST-USDC LP
  • At this point, the leveraged farmer has 199 SBR LP from 100 starting USDC, nearly doubling the yield.
  • The leverage farmer can choose to repeat the leverage cycle

Phased Introduction of Interest Rate

The introduction of leverage interest rate is a big change to Parrot’s financial design. This also introduces additional costs and risks to Parrot’s users. A phased process of introducing the interest rate will allow Parrot’s users to adjust their positions as necessary.

  • Stable vaults liquidation penalties will be reduced to 0.1%
  • Stable vaults liquidation level will be set to 100.5%
  • 2 weeks grace period before liquidation is turned on

Summary

The Parrot protocol is over-collateralized, and the fact that PAI, pSOL, pBTC are persistently below peg is because of “free” leverage being used, subsidized by the stable swap USDC providers.

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