A proposal to renew Gauntlet’s 12-month engagement with Compound on continuous market risk management to maximize capital efficiency while minimizing the risk of insolvency and liquidations to create long-term sustainable growth. Gauntlet renewed its partnership with Compound last year in September, which runs through September 27, 2023.
Since 2021, our proactive risk management has helped the Compound protocol avoid any major insolvencies, even through stress periods such as the USDC non-parity event, FTX-induced volatility, and tail asset liquidity crunches. We have expanded our service offering to include support for all existing and upcoming chains as Compound progresses toward its multi-chain future.
Compared to Gauntlet’s 2022 engagement, the proposed 2023 renewal has broader coverage and a simpler, more predictable fixed fee structure that is aligned with Compound’s multi-chain vision.
For the past four years, we have worked with Compound to maximize the protocol’s capital efficiency given an acceptable level of market risk.
Over the past year, we have delivered the following:
- Quantitative Research: Delivered Interest Rate Curve Framework, Initial Asset Recommendations for Compound Polygon USDC Comet, Continuous Research on V3 Migration (4 Phases), Initial Asset Recommendations for Compound Optimism USDC Comet, Improved Value at Risk (VaR) Methodology, Initial Parameter Recommendations for Compound Arbitrum USDC Comet, and Mechanism Design Analysis on the WETH Comet.
- Analysis: To support Compound’s multi-chain strategy, provided initial parameter recommendations for Compound V3 wETH Comet, Polygon USDC Comet, Arbitrum USDC Comet, and Base USDC and WETH Comets, as well as parameter recommendations for stMATIC, MaticX, and rETH. Continuously supported V2→V3 migration with Phase 1, Phase 2, Phase 3, Phase 4, pausing supply for tail assets and the v2 Deprecation Strategy.
- Risk Alerts: Firefighting, risk modeling, alert triggers, and recommendations during USDC depeg while communicating closely with Compound Guardian and the community. Achieved 0 new insolvencies in Compound during this unique tail market event. Launched Compound Market Alerts discord channel to increase accessibility and transparency to the community on market risks and utilization levels across all Compound comets.
- Recommendations: Provided 29 sets of parameter recommendations, including 93 total parameter changes to 19 total assets, 2 sets of IR curve recs, and 7 sets of incentive optimization COMP rewards recs. We also provided initial risk parameter recommendations for Compound deployment on V3 WETH, Polygon USDC, Arbitrum USDC, and BASE USDC and WETH.
- Community Updates: Continuously added features and improved UX for our Risk Dashboard to provide insight into risk and capital efficiency for the community. Updated the community on risk developments during Compound Developer Calls. Provided market updates covering all Compound comets on a weekly basis: Ethereum USDC, Polygon USDC, Ethereum WETH, Arbitrum USDC.
Please refer to our monthly updates for more details on the value we have contributed to the DAO.
In the two years prior to 2022, we worked formally and informally for Compound to perform market risk assessments, contribute to treasury management, optimize incentives, calibrate risk parameters, and upgrade the protocol.
Gauntlet’s Risk Management platform quantifies risk, optimizes risk parameters, runs economic stress tests, and calibrates parameters dynamically. We use agent-based simulation models tuned to actual market data to model tail market events and interactions between different users within DeFi protocols. Our simulations are constructed analogously to how transaction-level backtesting is done in high-frequency and algorithmic trading. Our platform provides similar statistical power in these actuarial analyses by modifying these techniques to handle the idiosyncrasies of cryptocurrencies.
We will continue to support Compound III, including all current and upcoming markets
- Coverage of base asset (USDC) and all collateral assets (WBTC, WETH, LINK, UNI, COMP)
- Supported risk parameters: Borrow Collateral Factor, Liquidation Collateral Factor, Liquidation Factor, Collateral Safety Grade, Supply Cap, Target Reserves, Store Front Price Factor, Liquidator Points, Interest Rate Curves
- Market conditions will determine the frequency of updates. For that reason, no SLA will be preset
Continued support for Compound II, until the community has decided to deprecate the market
- Coverage of all markets except Legacy (e.g., WBTC) and Deprecated (e.g., SAI, REP)
- Supported risk parameters: Collateral Factor, Close Factor, Borrow Cap, Reserve Factor, and Liquidation Incentive
- Strategic risk analysis such as the v2→v3 migration and v2 deprecation
Out of scope
- Protocol development work (e.g., Solidity changes that improve risk/reward)
- Formalized mechanism design outside of the supported parameters
1-year engagement (Sept 28, 2023 to Sept 28, 2024)
We aim to improve the following target metrics without increasing the protocol’s net insolvent value percentage:
- Value at Risk: conveys capital at risk due to insolvencies when markets are under duress (i.e., Black Thursday). The current VaR in the system is broken down by collateral type. Gauntlet computes VaR (based on a measure of protocol insolvency) at the 95th percentile of our simulation runs.
- Liquidations at Risk: conveys capital at risk due to liquidations when markets are under duress (i.e., Black Thursday). The current LaR in the system is broken down by collateral type. Gauntlet computes LaR (based on a measure of protocol liquidations) at the 95th percentile of our simulation runs.
- Borrowing Power: measures capital efficiency, representing potential upside for the protocol. Borrowing power represents the total available borrows based on collateral supplied to the protocol, calculated as supplies multiplied by the collateral factors of each collateral asset.
We aggregate this to a system level by taking a weighted sum of all the assets used as collateral.
- Risk parameter change steps: forum post, community discussion, on-chain vote
- Participation in community calls with explanations of risk parameter changes and any anomalies observed, including but not limited to Discord Developer & Twitter Spaces community calls
- Dynamic Risk Dashboard
- Market Downturn Risk Reviews to provide a detailed retrospective on market risk
We charge a service fee that seeks to be commensurate with the value we add to protocols and provides a strong signal of our alignment with the protocol.
Our fee aims to align with Compound’s multichain future. As Compound continues to expand to Base, Linea, Optimism, Arbitrum, and other chains, we will continue to devote resources to our engineering, data science, product, and protocol management teams in order to deliver research, analysis, recommendations, and risk alerts. With growth comes risk considerations, and we aim to continue providing transparent quantitative analysis to help the community make informed risk-reward tradeoffs.
The annual fee will be a fixed fee of $2,000,000, completely in COMP tokens. With this fee comes risk management support for 15 Comet deployments. There are currently 6 live Comet deployments. As such, this payment structure allows the protocol to scale flexibly with no marginal cost in risk management with 9 additional deployments. We note this is a fixed fee that will not change over the course of the engagement. Any deployment over 15 will be budgeted independently.
Insolvency refund: In order to increase our alignment with Compound and put actual “skin in the game,” we will refund a portion of our payment should our risk parameter optimizations incur losses for the protocol during the engagement. Our ultimate goal is to protect the protocol - we stand behind our work and want the community to have confidence in our recommendations.
How this works:
- A portion of our payment (up to 30% of the $2m fee) will be transferred from Compound in a lump sum COMP transfer to an on-chain vault.
- Losses are defined as any new insolvencies related to market risk or oracle failure.
- Exclusions: Issues related to smart contract bugs or related to an underlying asset that is smart contract related and dust accounts (defined as accounts with borrow less than $1,000). Refund does not apply if any of our risk parameter (excluding Reserve Factor) proposal fails during the engagement.
- Should losses occur, we will share an update with the community, and send funds back to the DAO in a timely manner.
- At the end of the engagement, any remaining funds in the vault will be removed, realized by our Finance team, and no longer eligible for a refund.
Reference: Last year’s service fee
Last year’s service fee was variable based on the following formula: performance fee = log(Number of Assets, 10) * Total Borrow * Marginal Base Fee tier bps. Given the total Borrow was <$2B, the annual service fee of the 2022-2023 engagement was ~$1.45m. More details can be found in last year’s renewal proposal. If the number of assets or total borrow increased, this fee would be higher according to the formula.
Service fee compared to last year
The proposed fixed service fee of $2m aims to be commensurate to the value Gauntlet provides as well as the costs of continuous research, feature development, integrations, monitoring, and firefighting. This year’s service fee is higher than the previous year ($1.45m variable) because of increased scope and coverage for 15 comets, additional Gauntlet resourcing on the Compound-dedicated team, and built-in redundancies for market risk analysis and simulation.
- Last year, Gauntlet covered only V2 and the V3 USDC Comet, as those were the only existing Compound markets. Since then, the protocol has been launched on Arbitrum, Polygon, and Base. Gauntlet aims to be aligned with Compound’s multi-chain future and provide the flexibility to scale with no marginal cost in risk management for 9 additional deployments to the current 6 live comet deployments (total of 15).
- To support the additional coverage, Gauntlet has grown the Compound dedicated team by 3 people including data science, developer, and product managers.
- Gauntlet created redundancy with internal tools for safety (simulation checks, governance tooling checks, alerting).
- Payment currency will be the same as our prior engagement - denominated in COMP at the current price. Note we may manage our token portfolio in the future for tax, operational, or other company requirements.
- For the insolvency refund, 30% of the fee will be paid in lump sum fund transfer, at the start of the engagement and deposited in a vault.
- The remainder of the fee will be paid via a year-long Sablier stream.
Please share any comments or feedback below. We are targeting to submit a governance proposal in the coming weeks.
Gauntlet is a simulation platform for market risk management and protocol optimization. Our prior and current optimization work includes engagements with Arbitrum, Aave, MakerDAO, Morpho, Uniswap, and many others.