DeFi Shadow Committee: Season 2 Recommendations

Interest Protocol

Recommendation

We support this proposal. Setting aside the broader merits of the lending protocol, which we’re still discussing, we view this proposed grant as a low-cost means of delivering a clear value-add to OP governance: allowing collateral to be delegated.

We believe deploying this capability will grant users more flexibility with their OP tokens while filling gaps in governance participation.

Background

Interest Protocol is a self-described lending and fractional reserve stablecoin protocol that employs capped collateral tokens as a risk management strategy. USDi borrowers pay a single borrowing interest rate, which changes depending on the reserve ratio. The interest paid by borrowers is distributed to all USDi holders as a rebase.

Interest Protocol claims to be able to issue more stablecoins than other lending or stablecoin protocols on the same amount of USDC collateral despite also being overcollateralized. Relevantly for Optimism, it also allows users to participate in governance with collateral funds. Interest protocol is currently deployed only on ETH mainnet.

Asks

31,764 OP for development and deployment costs on Optimism

We appreciate that the ask is tightly scoped and pegged to expected development needs, with calculations arriving at this number clearly shown. There is also a clear desired outcome attached to these costs.

One note is that we ask that the OP be distributed directly to developers rather than be market sold by Interest Protocol; aside from the fact that current guidelines prohibit the outright sale of OP by a grantee, contributing engineers should at least have the option to hold and/or delegate their earned OP.

What this means for Optimism

To us this grant is intended to provide a clear, needed benefit for Optimism in the form of facilitating more governance participation. We also envision this protocol helping grantees better manage their granted OP and offering them more flexibility in holding unused funds.

After reading the whitepaper, we have several open questions about the protocol itself, particularly with regard to its claims about fractional reserve issuance, but we look forward to engaging GFX Labs in learning more about how the protocol works. For now, we’re happy to support getting this feature deployed.

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