Analysis of the crvUSD borrowing interest rate mechanism, what does a high borrowing interest rate represent?
What does a high crvUSD borrowing interest rate mean?
Currently, crvUSD charges borrowers an average interest rate of >7.5%, which is even higher than the annual interest rate of the crvUSD LP pool. Crypto researcher DeFi Cheetah analyzed the calculation mechanism of crvUSD’s borrowing interest rate and believes that the current high borrowing interest rate reflects a greater demand from borrowers for leveraging long-term blue-chip stocks (BTC/ETH).
crvUSD maintains its peg through its dynamic interest rate and Peg Keepers (similar to Frax’s AMOs), which maintain the peg by minting or burning crvUSD in their AMM pool. For example, when crvUSD>1 USD, Peg Keepers will mint crvUSD in the AMM pool to increase supply, and vice versa.
Why is the borrowing rate of crvUSD currently so high? According to the borrowing rate formula: Lower PegKeeper debt = lower debt score = higher leverage demand = greater selling pressure = lower crvUSD price = higher borrowing rate.
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What is the bottleneck in further expanding the supply of crvUSD? So far, the huge borrowing demand is reflected in high borrowing rates, which are even higher than the annualized rate of the crvUSD LP pool. Once the annualized rate increases (such as in a bull market), the funding pool will be deeper, which can fully meet higher leverage demand.
Reference: https://twitter.com/DeFi_Cheetah/status/1673315556798394368
