Karate Combat: A DeFi Lending Case Study for Sports League Tokens

The recent Karate Combat event on December 19th offered fascinating insights into how real-world sporting events and their associated assets’ utility impact DeFi lending protocols and use behavior. The next Karate Combat KC52 event is coming up on January 24th and will be hosted in Miami, FL.

Bonzo Finance, an open source, non-custodial lending protocol based on Aave v2 and deployed on the Hedera network witnessed diverse lending market behaviors for $KARATE, the native token of the Karate Combat ecosystem.Let's explore what took place before, during, and after the event, what was learned, and what parameter changes were made post-event.

Understanding $KARATE Utility

The $KARATE token serves dual purposes within the ecosystem: it enables no-lose betting on fighters through the Karate Combat application while also functioning as a governance token, allowing fans to dictate rules of the league. This unique utility created interesting dynamics in the $KARATE lending markets during this December event.

Market Behavior Leading Up to the Event Snapshot

As the event approached, the Bonzo Finance protocol observed two distinct patterns in user behavior for the $KARATE asset pool (historical metrics):

First, users started gradually withdrawing supplied $KARATE from the lending pool, starting one week before to the token snapshot which took place 48 hours prior to the December 19th event, presumably to participate in the betting activities in the Karate Combat application. It’s important to note that no lose betting on Karate Combat fights requires tokens to be held in a participating wallet 48 hours prior to the event for a snapshot.

Simultaneously, Bonzo Finance saw a gradual increase in borrowing activity starting around the same time, as users leveraged their existing collateral to acquire more $KARATE, likely to increase their betting positions.

These behaviors were clearly reflected in $KARATE individual asset metrics, with both supply APY and borrow APY showing gradual movements in response to changing market dynamics.

Peak Market Metrics

The culmination of this activity 48 hours prior to the Karate Combat event on December 19th resulted in some remarkable numbers in the $KARATE pool, and lasted for approximately 24 hours:

• Utilization rate peaked at 94.7%
• Supply APY reached 100.27%
• Borrow APY climbed to 149.04%

Post-Snapshot Market Normalization

In the days following the snapshot and post-event winnings being distributed, the market demonstrated a healthy recovery pattern.

The $KARATE total value locked (TVL) gradually returned to pre-event levels, suggesting successful betting outcomes for many participants resulted in their initial supply and winnings being supplied back to the protocol. Borrowing activity normalized, with utilization rates dropping significantly, and APYs returned to their pre-snapshot levels.

Key Learnings & Protocol Improvements

This event highlighted several areas for protocol interest rate optimization:

• It was identified that the 94.7% utilization rate was problematic, as it effectively limited liquidity access for suppliers, preventing them from temporarily withdrawing liquidity (but as compensation, receiving a healthy APY yield).
• The borrow APY, while high, didn't create sufficient incentive for position management of repaying loans or supplying $KARATE until after the event concluded.

Protocol Adjustments

Based on these insights, the Bonzo Finance protocol implemented two key interest rate model changes to enhance market efficiency:

1. Optimal Utilization Rate: Reduced from 70% to 55%, meaning the protocol now triggers higher interest rates via slope 2 at a lower utilization threshold.
   1. Optimal Utilization Rate: The target utilization rate where borrowing rates begin to increase more aggressively via “slope 2” to maintain protocol balance.
2. Slope 2 Adjustment: Increased from 100% to 300%, creating a more aggressive interest rate curve when utilization exceeds the optimal rate. This means borrowers could face up to 300%+ borrow APY at maximum utilization, encouraging more active position management.
   1. Slope 1 Defined (blue): The gradual interest rate increase applied when utilization of an asset pool is below the "optimal utilization" point. Slope 1 determines the borrow APY and Supply APY for an asset pool.
   2. Slope 2 Defined (orange): The steep interest rate increase applied when utilization of an asset exceeds the "optimal utilization" point. Slope 2 is designed to discourage 100% utilization of an asset pool and determines the borrow APY and Supply APY for an asset pool.

The interest rate model parameters and a comprehensive change log for Bonzo Finance-supported asset markets can be found in the Risk Framework documentation.

Looking to the Future

These adjustments demonstrate Bonzo Finance’s commitment to maintaining robust and efficient lending markets. By implementing more responsive interest rate mechanisms, the protocol aims to better balance user access to liquidity while maintaining attractive yields for suppliers.

This Karate Combat event offered insights into how sport league-specific tokens and their associated utility interact with DeFi lending protocols, and the Bonzo Finance Labs team is grateful for the opportunity to optimize the protocol based on real-world usage patterns.

These improvements should help ensure the protocol remains resilient during future high-activity periods while continuing to serve both borrowers and suppliers effectively. And more insights will be made available after the next Karate Combat KC52 event takes place on January 24th.

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DISCLAIMER
The information provided in this blog post is for informational purposes only and should not be considered financial, investment, legal, or tax advice. Bonzo Finance Labs makes no representations about the accuracy, completeness, or suitability of this information. Any reliance you place on such information is strictly at your own risk.

Digital assets and DeFi protocols involve substantial risk of loss. Past performance is not indicative of future results. Market metrics, interest rates, and APY figures mentioned are historical and may fluctuate significantly. Smart contract risk, technical vulnerabilities, and market volatility can result in partial or total loss of funds.

The analysis presented represents historical observations only. Protocol improvements and parameter adjustments do not guarantee protection against future risks. Users are responsible for ensuring compliance with applicable laws and regulations in their jurisdiction before engaging with any products or protocols mentioned.This content may contain forward-looking statements based on current expectations that are subject to risks and uncertainties. References to third-party protocols or services do not constitute endorsements.

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