Summary
If the community wishes to add a Base AERO comet, Gauntlet recommends the following parameters:
Risk Parameters
| Asset | Supply Cap | Collateral Factor | Liquidation Factor | Liquidation Penalty |
|---|---|---|---|---|
| USDC | 30M ($30M) | 65% | 70% | 20% |
| WETH | 7,500 (~$20M) | 60% | 65% | 25% |
| wstETH | 5,000 (~$15.5M) | 60% | 65% | 25% |
| cbBTC | 150 (~$10M) | 60% | 65% | 25% |
Interest Rate Curve Parameters
| Parameter | Recommended Value |
|---|---|
| Annual Borrow Interest Rate Base | 0.04 |
| Annual Borrow Interest Rate Slope Low | 0.0706 |
| Borrow Kink | 0.85 |
| Annual Borrow Interest Rate Slope High | 15.0 |
| Annual Supply Interest Rate Base | 0 |
| Annual Supply Interest Rate Slope Low | 0.08 |
| Supply Kink | 0.85 |
| Annual Supply Interest Rate Slope High | 11.0 |
COMP Incentives
| Parameter | Recommended Value |
|---|---|
| Daily COMP Supply Rewards | 15 |
| Daily COMP Borrow Rewards | 15 |
Analysis
Market Risks
The community should be aware of the risks of adding an AERO comet. Unlike stablecoin comets (USDC/USDT), the AERO token is highly volatile, even more so than WETH. Additionally, the collateral assets in the AERO comet are not pegged to AERO, so price spikes in AERO could lead to widespread absorptions of collateral, increasing liquidity demands and necessitating fast, sophisticated liquidator bots. We recommend setting high liquidation penalties across all collateral assets, even for highly liquid or stable ones.
If AERO’s price spikes, the protocol could face immediate insolvencies if collateral is not absorbed quickly enough. To mitigate this, we propose an extra 10% buffer between the Liquidation Factor and Liquidation Penalty values.
Furthermore, Gauntlet wants to draw attention to potential risks and ongoing reductions in long-term liquidity resulting from the consistent entry of over 10 million AERO emissions on average into the market every epoch (spanning 7 days), projected to continue for several upcoming epochs. Only a fraction of these emitted AERO tokens are being converted into veAERO, with the average percentage of tokens locked showing a declining trend.
This might contribute to a decrease in the quality/availability of swaps, resulting in higher slippages. Consequently, liquidations can become less profitable, thereby elevating the risk profile associated with AERO as an asset. The additional buffer provided with high Liquidation Penalty should help alleviate some of the concerns. Given the current and future market circumstances, Gauntlet would like to flag the above risks associated.
Interest Rate Curve & Incentives
The recommended curve has a kink at 85%, with an implied reserve factor of 20%. At the kink, the Supply APR is 6.8% and the Borrow APR is 10.0%. At 100% utilization, the max Borrow APR is 235%, and the max Supply APR is 172%. Based on current demand, market equilibrium would settle slightly above the 85% kink.
The recommended Daily COMP Supply/Borrow Rewards of 15 are designed to incentivize initial supply and borrowing activity. With COMP priced at $50, the Distribution APR would be around 30% at $1M TVL, diluting to about 1% at $30M TVL.