As a general philosophy, it makes sense that vaults with virtually 0% chance of liquidation should get virtually 0% of rewards.
I agree with an earlier comment that USDC deposited and USDC borrowed (e.g on compound) should definitely have minimal rewards.
Yet the system needs to be straightforward enough that it is easily gamed. This isn’t that easy to accomplish. Ppl are right that big whales who can run bots can adjust ratios constantly in a way that regular folks can’t, especially with gas being what it is (just see uni v3 lol). It’d probably not ideal to incentivize this behavior.
For the above reason, I think having it be exponential is going too far (‘regular’ borrowers will get virtually no rewards and they will stop switching over).
Some kind of linear application of (minimum collateral ratio/current collateral ratio) seems like a decent place to start. Also interested in how we can lower incentives for USDC collateral with a USDC loan type of borrowing.