It's basic economics guys, the rate is dictated by the market. It will always find it's level where it is both low enough for traders and high enough for lenders. That level will constantly be shifting.
The flash return rate option is anything but market, and how much money is currently at the flash return rate? If it's a lot, then that means the interest rate is determined by the few who lend / borrow at fixed rate. Here are my proposals once again for changing flash return rate option.
Treat it like a market order, it'll hit everything on the "liquidity request" until there's nothing left with unfilled amount returned.
Completely cancel that option, one must lend at at fixed rate (my preferred approach).
A limited version of above, flash return rate is only available as long as it compose less than 10% of the lending market. (you want 90% turn out rate in the 'vote' for interest rate)
Re-do the FRR calculation, instead of calculating base on all fixed rate loan, the top 10% and the bottom 10% of fixed rate loans are ignored for calculation purposes to avoid manipulation, and borrower at FRR needs to pay some markup base on BTC / USD volatility and lending duration.
The beautiful thing is: You can't manipulate the system and gain from it! Sure, you could provide a lot of funds at very low or very high rates, maybe even to yourself. But you'll lose out on real fees from real people if you would instead provide liquidity to them, andyou always pay some percentage to the platform. There won't be that much more variable rate liquidity out there than fixed rate. In fact, I guess there's more fixed than variable rate.
Finally, noone's forcing anybody. If the variable rate is too low for your taste, put up a fixed offer for a higher rate. Easy. If you're not too far from the consensus of the other providers, your offer will be taken up eventually. If everybody else believes a much lower rate is acceptable, well, then you're out of luck for now..
It's always both sides anyway - a higher variable rate, or fixed rate, doesn't mean that the takers agree to that and take the offers.
Ente