As we start Season 3, we are proposing an update to the product roadmap that, while continuing to track with the original Inverse 2025 product roadmap proposal, includes a number of important changes.
Market research
As FIRM borrow capacity began tracking higher in Season 2, we’ve taken a deeper look at attitudes toward FiRM via 1:1 interviews with borrowers. The main takeaway is we have more work to do to make borrowing with DBR more intuitive but also more aligned with user DBR purchase preferences.
Ease of Use
We heard from multiple users, including some sophisticated users with large wallets, that borrowing with DBR’s can be confusing and the borrowing experience should be simplified and made more “hassle free.”
Another category of feedback relating to ease of use relates to yield farming. Today users who borrow on FiRM make a trip to, say, Aerodrome where they swap half their DOLA for USDC and deposit the pair in a liquidity pool. Many deposit the LP token in an autocompounder for additional yield. Users told us they’d like us to reduce the hassle here as well.
A final category of feedback from users was around how replenishments work as well as liquidations and whether both can be made less brutal for affected users.
DBR Purchase Behavior
FiRM analytics show that most users are not borrowing over long time durations - yet. The median user borrows for 3 months and purchases an equivalent amount of DBR. Longer duration borrowers similarly purchase 2-3 months of DBR and then buy more as their DBR balance approaches zero.
As a lending protocol targeting long-term borrowing with fixed rates, we are naturally interested in better understanding DBR purchase behavior. One insight from our research is that users who are “long” interest rates (i.e. think rates will rise) are on average fine with deploying capital to buy DBR upfront. Conversely, users who are “short” interest rates (i.e. think rates are too high and will decrease in the future) or “neutral” may prefer to buy smaller amounts of DBR if they believe they can purchase DBR at a lower rate in the near future. Worst case, when industry interest rates and DBR prices are high, users may simply delay or decline to initiate a loan.
Another challenge with DBR is the capital efficiency of acquiring a large DBR position to service a long-term loan. For example, for just a 24-month, $100,000 loan on FiRM, a user today may acquire an outlay of over $10,000 in DBR, which for some may be viewed as a poor allocation of capital, especially in environments where interest rates are falling.
High-level Takeaway #1: Rethink Ease of Use
DBR is the most elegant solution to-date for solving the fixed rate lending problem in DeFi, but it’s a novel concept that to-date has utilized a UX that takes some practice for even some sophisticated users. Conventional variable rate DeFi lending (e.g., Compound-style) or even TradFi lending (e.g., online mortgages) are the more familiar borrowing paradigms for users and to bring fixed rate borrowing to greater number of users, the FiRM v2 UX should welcome users with a more familiar borrowing experience than what is found today in FiRM v1.
High-level Takeaway #2: Rethink The Way Users Acquire DBR
Two important takeaways from our research is that borrowers on FiRM should ultimately be able to acquire DBR in the way that is best for them individually and Inverse Finance DAO should be indifferent to the way a user acquires DBR, all things being equal.
We can think about user DBR acquisition as a distribution problem. First by segmenting our users according to their DBR distribution/acquisition preferences and across the two attributes described above:
- Attitude towards to future interest rates
- Need for convenience/ease of use
A Proposed Path Forward for FiRM v2.0
The design of FiRM v2 is primarily about making it easier to borrow on FiRM: no matter your borrowing preference.
Part 1: Simple UX + Smart Debt Manager
While the current FiRM UX will be preserved for users who like the flexibility and completeness of the UX, we expect many users to opt for a new, simpler UX that brings us closer to a conventional fixed rate lending UX where users can simply specify:
- collateral asset,
- loan size, and
- loan duration
without the need to understand, acquire, and self-custody DBR. Instead, using a new Smart Debt Manager contract that custodies DBR for users based on the specified loan amount and duration, expressing DBR cost as “interest cost,”
While a user’s debt is increased by the amount of the DBR acquired by the Smart Debt Manager, there is no DBR held in a user’s wallet and, as shown below, there are multiple paths for further simplifying the ongoing management of a loan.
Part 2: New Loan Refinancing and Extension Options
Extending Loan Maturities via Refinancing
A variation on the early repayment theme that can help the DAO achieve longer loan durations on FiRM is to offer better options for refinancing loans. Today, a user must manually acquire additional DBR to extend or “refinance” a loan, however to users this process may seem cumbersome or even confusing.
To remedy this, we propose a simpler “refinance” option for existing loans in FiRM for borrowers who are either neutral or short interest rates or who simply want the convenience of manually refinancing a FiRM loan for a specified period, “Manual Refinance Mode” allows users to initiate an extension of a loan in a single click at the current market interest rate.
Here’s simple example of how refinancing works in FiRM v2:
- On Monday John borrows $100 DOLA for one year with $150 in collateral
- DBR is priced at 10 cents each, making 100 DBR = $10. This cost is added to his loan so his loan balance is now $110.
- The additional $10 is represented as “interest expense” for his loan.
- John notices that interest rates (DBR price) has fallen to 5%.
- He clicks on a “Refinance My Loan” button on the new FiRM UX, where a new loan is initiated at the lower interest rate (DBR price) for a specified time period along with an early repayment penalty added to the user loan balance.
Note that refinance features will incorporate “early withdrawal” fees to cover interest rate differentials if the interest costs of one’s original loan exceeds that of the new loan.
Extending Loans with Paygo
We can further simplify the borrowing process by alleviating the need to monitor the DBR position in a user’s wallet altogether using “Paygo Mode”
- Paygo (short for “pay as you go”) adds DBR to a user’s wallet on a per-block basis after the user’s DBR balance reaches zero.
- For “pro” users who self-custody DBR, DBR is added to the user’s wallet also on a per-block basis while the user’s loan balance is commensurately increased.
- For users of the Simple UX, this interest is based on the prevailing market price for DBR.
- Ideal for those who are short or neutral interest rates to passively extend the duration of their loans.
- Importantly, Paygo becomes the default DBR/interest payment mode for all loans where either DBR balance has reached zero or where a loan in the Simple UX has reached maturity.
An additional benefit of Paygo is that it allows FiRM to better service users when interest rates are temporarily high, leading to improved lending capacity utilization and better revenues for the DAO, enabling faster bad DOLA debt repayments. Paygo is an exciting feature for FiRM v2 that is expected to improve borrower retention, average revenue per loan, and lifetime value of each borrower we attract to FIRM.
Users who are short interest rates or place a high emphasis on convenience will find Paygo mode most attractive:
Part 3: Pro Users
For advanced or “pro” users on FIRM, the existing feature-rich UX may be preferable, in which case the current DBR Prepay option remains available. Today’s DBR acquisition model for FiRM serves those who are long or neutral interest rates and who prefer to self-custody DBR. Pro users will have the option to use Paygo as well.
4: Standalone FiRM Website
As part of implementing the Simple UX, a new stand-alone website exclusively dedicated to FiRM is needed. This standalone presence can allow us to experiment more freely with design and usability, improve SEO, and provide FIRM-specific navigation and content that may be not consistent with current inverse.finance design. The existing inverse.finance website was launched nearly four years ago and the site has expanded to include a growing number of pages, messages, uses, etc. which can make the experience overwhelming for first-time visitors.
Inverse Autocompounder
DOLA offers some of the most competitive rates in the industry for liquidity providers and users are seeking ways of taking advantage of rates in a more convenient way. A second aspect of FiRM v2 is the introduction of the Inverse Autocompounder which will allow DOLA borrowers to deposit into an auto compounding collateral of their choice with a single click.
For users who prefer to rotate LP positions on popular sites like Beefy, Extra, or Dyson, those options will be available as always. But for those seeking maximum convenience when borrowing on FiRM, we believe the addition of this option will offer an enticing and competitive option for leveraged yield farming…
This feature stands to generate modest but valuable working capital for the DAO as bringing a portion of existing autocompounding activity in-house avoids value leakage to third parties.
Progressive Liquidations
We propose the addition of “gradual liquidations” to FiRM v2 inspired by the liquidation model of Euler and Morpho.
Today users in “hard” liquidation have a portion of their collateral (e.g. 60%) sold in order to repay a portion of their debt while also paying a liquidation incentive to the liquidator (e.g. 10%) of the repaid loan amount.
With gradual liquidations, instead of having a fixed liquidation incentive that any liquidated position has to pay, liquidations will instead increase their incentive as they get further and further under the collateralization limit. This makes liquidations a lot softer for borrowers, as most liquidations will be liquidated at a very low penalty, while improving protocol security, as collateral can be liquidated at a higher penalty if they become sufficiently underwater.
We will also make the liquidation factor a function of loan size. Liquidation factor is the percentage of collateral that is liquidated upon liquidation. Small loans require a high liquidation factor, as they must sufficiently incentivize liquidators to liquidate them when underwater. Large loans risk causing large slippage of prices when being liquidated at a high liquidation factor, making them harder to liquidate at high liquidation factors. By making the liquidation factor a function of loan size, we improve security at both ends of the spectrum. These improvements ultimately allow us to decrease collateralization requirements.
Adding gradual liquidations to FiRM v2 improves both the user experience while also reducing the risk of bad debt on FiRM.
FiRM on Base
Our plans to bring FiRM to Base and other L2’s were delayed due to lending capacity constraints however with the addition of new products like sDOLA, LP collateral on FiRM, and a gradual reduction in DOLA bad debt, we expect to be ready to bring fixed rate lending to a new chain. With the implementation of Paygo, the Inverse Autocompounder, and soft liquidations, a FiRM instance on Base will have maximum revenue impact for the DAO.
Sister Project Candidates: USD2 and New Horizons
As a final note, it is important to share that DAO contributors are studying or prototyping complementary “sister projects” that leverage the DAO’s wealth of lending, stablecoin, and product development expertise but also our ability to rapidly inject large amounts of liquidity into new markets via DOLA Feds and our partner ecosystem. With the goals of faster DOLA bad debt repayment and creating new INV tokenholder value, it is likely that one or more such proposals - code-named USD2 and New Horizons - will surface in the coming weeks and months for DAO consideration.