[Gauntlet] BASE v3 & Arbitrum v3 - Risk Recommendations (02/09/2024)

Simple Summary


Gauntlet recommends the following risk parameter updates for the Arbitrum v3 USDC Native comet:

  • Increase GMX Supply Cap from 50,000 to 100,000
  • Increase GMX Liquidation Factor from 45% to 60%
  • Increase GMX Collateral Factor from 40% to 50%
  • Increase ARB Supply Cap from 8,000,000 to 16,000,000
  • Increase ARB Liquidation Factor from 60% to 80%
  • Increase ARB Collateral Factor from 55% to 70%
  • Increase ARB Liquidation Penalty from 7% to 10%
  • Decrease Store Front Price Factor from 80% to 60%
  • Increase WETH Supply Cap from 5,000 to 10,000

Gauntlet recommends the following risk parameter updates for the Arbitrum v3 USDC.e comet. The risk parameter updates for the USDC.e Comet are only risk-off measures to ensure the native USDC Comet is more appealing:

  • Increase ARB Liquidation Penalty from 7% to 10%
  • Decrease Store Front Price Factor from 80% to 60%

Gauntlet recommends the following risk parameter update for the Base v3 USDbC comet:

  • Increase cbETH Liquidation Penalty from 7% to 15%


Analysis


Arbitrum v3 USDC Comet

Parameter Current Value Recommend Value
GMX Supply Cap 50,000 100,000
GMX Liquidation Factor 45% 60%
GMX Collateral Factor 40% 50%
ARB Supply Cap 8,000,000 16,000,000
ARB Liquidation Factor 60% 80%
ARB Collateral Factor 55% 70%
ARB Liquidation Penalty 7% 10%
Store Front Price Factor 80% 60%
WETH Supply Cap 5,000 10,000

Gauntlet recommends parameter changes for the Collateral Factor, Liquidation Factor, and supply cap for GMX and ARB assets within the Arbitrum USDC Comet. Our recent analysis of Compound’s liquidation mechanism supports the parameter changes that should enhance capital efficiency while mitigating insolvency risk.

GMX Top Suppliers

User 0x1c6b5795be43 utilizes 92% of GMX Supply Cap, with a supply position of $2.1M GMX. If the account were to be liquidatable, liquidators could swap the $2M GMX on DEXs with 2% slippage.

GMX Slippage Curve


Link to chart

In a hypothetical situation where the Liquidation Factor and Supply Cap are raised to 60% and 100k, respectively, and this position consistently maximizes the cap by allocating 60% of GMX collateral towards borrows, the existing DEX liquidity would allow liquidators to swap the position with ~4% slippage.

ARB Top Suppliers


The same top supplier of GMX 0x1c6b5795be43, is the top supplier of ARB. The current $7.5M of ARB supplied by this user can be liquidated with 1% slippage via DEX liquidity. If this user utilizes the full remainder of the ARB cap liquidity after the cap increase (16M), their estimated ARB supply of $22M would incur a slippage of 10%. Thus, we recommend increasing liquidation penalty to 10%.

Gauntlet recommends to increase the WETH supply cap for Arbitrum v3 USDC Comet. There remains approximately $3M in available supply cap liquidity. Increasing the supply cap to 10k should create an extra $15M in available supply cap liquidity.

Arbitrum v3 USDC.e Comet

Parameter Current Value Recommend Value
ARB Liquidation Penalty 7% 10%
Store Front Price Factor 80% 60%

Since Circle intends to continue migrating all USDC.e to USDC and eventually deprecate USDC.e within the Arbitrum ecosystem, Gauntlet will not recommend to increase the borrowing power of users. Gauntlet will recommend implementing the same risk-off recommendations from the Native market.

Gauntlet will decrease the Store Front Price Factor for Arbitrum USDC and Arbitrum USDC.e Comet markets to 60% to align it with other USDC comet markets. The decrease in Store Factor Price will provide a further insolvency buffer to the protocol if severe price volatility occurs during the liquidation process. For assets GMX and ARB, liquidators would still generate higher liquidation fees based on the increase in the Liquidation Penalty.

BASE v3 USDbC Comet

Parameter Current Value Recommend Value
cbETH Liquidation Penalty 7% 15%

cbETH Top Suppliers BASE v3 USDbC Comet

The largest cbETH collateral position has a healthy health factor of 2.35, but would incur a 60% slippage upon liquidation. Consequently, Gauntlet recommends raising the liquidation penalty to 15% and not increasing the supply cap for cbETH.

Collateral Factor Methodology

We recommend increasing the Collateral Factor of each asset to offer users increased borrowing capacity while shielding them from liquidation during volatile market conditions. When setting the CF, we take into account the historical volatility of the asset and simulate highly volatile conditions utilizing the below formula:

Next Steps

Target on-chain vote 2/19/24 to give the community time to review the recommendations.

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On-chain proposal has been published here.

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Good[Gauntlet] به‌روزرسانی‌های هفتگی بازار: Arbitrum USDC.e

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The proposal has passed and been executed. We thank the community for their participation.

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