AMM Curve Comparison

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With Notional v3 the underlying AMM curve is also changing to a more efficient one.

You might have heard of the logit curve, the model that Notional v2 uses to determine the interest rate for each fCash market.

But did you know that we are changing it to a new and improved model? 😊

A 🧵 to compare b/w the two curves.

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The logit curve is a symmetrical curve that adjusts the interest rate based on the utilization of the market. The higher the utilization, the higher the interest rate. 📈

But the logit curve has some issues that make it suboptimal for our protocol. 😅

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The first issue is that the logit curve wastes a lot of capital by allocating it to very low or negative interest rates. This means that a large part of the LPed capital is not earning any return or even losing money. 💸

For example, 40% of the capital on Notional currently sits below the 0% rate. That’s not very efficient, is it? 🤷‍♂️

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The second issue is that the logit curve makes it difficult to accommodate specific interest rates at certain proportions. This means that we can’t fine-tune the curve to match the market demand and supply. 📊

For example, we can’t set the curve to have a flat interest rate of 5% for a wide range of utilization. That’s not very flexible, is it? 🤷‍♀️

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The third issue is that the logit curve model is relatively complex and slightly unintuitive. This means that it’s hard for users and governance to understand and predict how the curve behaves and changes. 🧠

For example, we can’t easily explain how the curve parameters affect the interest rate at different utilization levels. That’s not very user-friendly, is it? 🙅‍♂️

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That’s why we decided to change the current logit curve model for a double kink interest rate model. The double kink interest rate model has three slopes that define how the interest rate changes with utilization. 📉

The double kink model gives us more control and flexibility over the interest rate curve. 😍

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With the double kink model, we can:

• Avoid wasting capital by allocating less liquidity to low or negative interest rates with the first slope. 💰

• Accommodate specific interest rates at certain proportions with the second slope. 💯

• Make rates increase sufficiently as utilization goes up with the third slope. 🔥

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The double kink interest rate model is also simpler and more intuitive than the logit curve model. This means that it’s easier for users and governance to understand and predict how the curve behaves and changes. 😎

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The double kink interest rate model will only be updatable once every quarterly roll. Governance will need to specify the new curve parameters ahead of the roll and changes will only become effective upon the roll. 🗓️

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That’s it for this thread. I hope you learned something new today about our interest rate model upgrade and why we are excited about it. 💯

If you have any questions or feedback, feel free to drop them in the comments below. 👇