I've come to really dislike the Flash Return Rate. I'll try and be articulate about why...
The problem as I see it, is that it's currently the only option for offering swaps at a variable rate, and the only option to offer automatically at a rate that adjusts (somewhat) to market conditions. If you want to be fairly hands-off and automated about things, it's kind of the only game in town. It's normally nowhere near an optimal rate to be offering at - being either too high when rates are decreasing and everyone jumps in front of it, or far too low when rates have headed back up (see also: right now), but without any other auto-rate options it gets heavily used.
So we get, most of the time, an enormous wall of offers all placed at the single FRR, making it very difficult for the rate to rise higher - the FRR keeps slipping down as the average diminishes, until there's enough pressure to chew through it all at once (or possibly by 30-day swaps being taken over the head of the FRR-wall) and the rate suddenly spikes upwards, dragging the FRR reluctantly upward with it.
So that's my thesis - FRR is a magnet for a giant heap of offers from those who don't have the free time required for manual management, or who want to avoid being stuck in a poorly placed fixed-rate swap, and its effect on the market is to produce that weird sawtooth pattern in swap rates, with sharp increases followed by slow deteriorations. I really wish there were better options for an automated rate. Or even just more options so as to spread the pile out a bit more. If we could set offers at a fixed offset away from the FRR, or have fixed-rate offers that are automatically placed at a certain 'depth' into the book of offers, or have a tracker rate that's slightly more responsive (a weighted moving average of recent fixed-rate swaps rather than a simple average rate?)... then I would be so happy.
I think you are missing the true issue here and that is that the
FRR exists at all. If it did not, lenders would have to maintain their offers daily or set a minimum rate they are willing to accept and use auto-renew. If they did, the FRR wall would not exist. There might be just as much money in the pool but it would be spread out instead of lumped at one rate. I think this would be more fair in that those who are willing to accept a lower rate will have the highest rate of swaps taken while those who want to gouge the borrowers will only do so when demand is very high. Lenders will not get the advantage of the swap going up during it's term like the FFR but will have to accept that since they had undercut other lenders to get the swap taken.
I think the FRR is a crutch and should be removed. It exists for lazy lenders to get a "good enough" rate without have to maintain their swaps. For those who would say that they don't have time to check their swaps daily, then don't, remove your swap offers or set them to a fixed value. Bitfinex expects the traders to maintain their positions on a day to day basis and I don't see why the same philosophy should not apply to lenders.