Gauntlet <> Compound Renewal 2024

[Gauntlet]

Summary

A proposal to renew Gauntlet’s 12-month engagement with Compound on Risk Management, Yield Optimization, and Incentive Optimization. The scope of work includes continuous market risk management to maximize capital efficiency while minimizing the risk of insolvency and liquidations to create long-term sustainable growth. Incentive optimization aims to bootstrap liquidity, promote growth, and facilitate decentralized governance.

Over the past five 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 also been formally providing Yield Optimization and Incentive Management Services to the Compound DAO.

Last year, Gauntlet transitioned from a variable fee structure to a fixed fee model to provide greater predictability for both the DAO and our team. We remain committed to this approach and are renewing our services at the same price point. In recognition of our close collaboration over the past five years, we are also expanding our scope of work to further support the DAO’s needs.

Results

Since 2021, our proactive market 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, tail asset liquidity crunches, and the most recent market volatility in August 2024. We have expanded our service offering to include support for all existing and upcoming chains as Compound progresses toward its multi-chain future. We have also expanded our service to include interest rate curve and COMP incentive spend optimization.

Compared to Gauntlet’s 2023 renewal, the proposed 2024 renewal:

• Same fixed price of $2.3M ($2M for risk management and $300K for yield and incentive optimization)
• Includes all of the same scope of Risk Management, Yield Optimization, and Incentive Optimization, but bundled into one simpler engagement rather than separate engagements
• Has broader Comet coverage (25 vs. 15)
• Additional Scope - includes Economic Analysis work for any upcoming Compound Staking product
• Maintains a predictable fixed fee cost structure for Compound

Background

For the past five 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 also been providing Yield Optimization and Incentive Management Services to the Compound DAO.

Over the past year, we have delivered the following:

• Quantitative Research: Delivered action-oriented research on areas including LST oracle analysis, reserves and targetReserves, Compound v3 liquidation mechanism, lending efficiency, v2 Deprecation Retro, and stablecoin interest rate curve recommendations
• Analysis: To support Compound’s multi-chain strategy, provided initial parameter recommendations for all comet deployments including Initialize native USDC market cUSDCv3 on Arbitrum, Initialize cUSDbCv3 on Base, Initialize cUSDCv3 on Arbitrum, Initialize cUSDCv3 on Polygon, Initialize cWETHv3 on Ethereum, Initialize cUSDCv3 on Optimism, Initialize cUSDCv3 on Scroll, Initialize cUSDCv3 on Base, Initialize cWETHv3 on Optimism, Initialize cUSDTv3 on Ethereum Mainnet, Initialize cUSDTv3 on Polygon, Initialize cUSDTv3 on Arbitrum, Initialize cWETHv3 on Arbitrum, Initialize cUSDTv3 on Optimism
• Risk Alerts: Firefighting during all market crisis events while communicating closely with Compound Guardian and the community. Avoided any meaningful insolvencies in Compound
• 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. Gauntlet currently covers Compound’s 16 comet markets
• Partner Collaboration: Collaborated closely with partners including AlphaGrowth, OpenZeppelin, and Chainlink through new comet launches, new collateral listings, and strategic initiatives
• 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

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.

Proposal

Scope

Gauntlet’s Risk Management platform quantifies risk, 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 and all collateral assets
• Supported risk parameters: Borrow Collateral Factor, Liquidation Collateral Factor, Liquidation Factor, Supply Cap, Target Reserves, Store Front Price Factor
• Supported yield and incentive optimization parameters: Interest Rate Curves, COMP spend
• Market conditions will determine the frequency of updates. For that reason, no SLA will be preset
• Should the community launch a staking product, Gauntlet will conduct any requested analyses of proposed mechanisms or designs on a best-efforts basis

Continued support for Compound II, until the community has decided to completely 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
• Continued 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

Duration

1-year engagement (Sept 28, 2024 to Sept 28, 2025)

Expectations

Outcomes

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
• Aggregate Reserve Growth: Measured as reserve revenue growth
• Protocol Profit: Measured as reserve revenue less incentive spend

Communications

• Parameter change steps: forum post, community discussion, on-chain vote
• Participation in community calls with explanations of 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

Cost

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 multi-chain and multi-asset future. As Compound continues to expand to other chains and list novel primitives such as Liquid Restaking Tokens, we will continue to devote resources to our engineering, data science, product, and protocol strategy 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 $2,300,000. With this fee comes risk management support for 25 Comet deployments. There are currently 16 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 25 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 (30%) 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. This is consistent with Gauntlet’s terms last year.

Payment Terms Specifics:

• A portion of our payment (30% of the $2.3M fee) will be transferred from Compound in a lump sum COMP transfer (at spot price at the time of proposal) directly to Gauntlet. Gauntlet will refund the DAO up to 30% of our fee ($690K) in any event as defined below:
  • 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). Refunds do not apply if any of our risk parameter (excluding Reserve Factor) proposals do not pass governance.
  • Should losses occur, we will share an update with the community, and send funds back to the DAO in a timely manner.
• For the remaining 70% of the $2.3M fee, this will be paid in USDC via the Vendor Payments Aera Vault (this follows the same process that the community has approved for Open Zeppelin).
  • $1.61M (70% of the $2.3M fee) is paid in USDC via Llamapay and Aera, and streamed linearly to Gauntlet over a year.
    • From the DAO, $2.2M in COMP (at spot price at time of proposal) will be sent to an Aera vault owned by Compound governance. This $2.2M includes a small buffer relative to $1.61M in order to hedge COMP price movements, and will be diversified into USDC.
      • During this period the USDC will be deposited into Compound III USDC Comet to provide liquidity and generate yield for the DAO.
    • Simultaneously, a Llama Pay stream will be set up for 1.61M USDC streamed linearly to Gauntlet. This way, Gauntlet receives price stability by receiving 1.61M USDC over the course of the engagement. Any remaining funds left in the Aera vault after payment are owned by the Compound DAO.
    • As a reminder, the Aera vault is completely owned by the Compound Gov Bravo Timelock, and governance has complete control over this vault including the payment stream as described in Aera’s initial post.

Next Steps

Please share any comments or feedback below. We are targeting to submit a governance proposal in the coming weeks.

About Gauntlet

Gauntlet is a simulation platform for market risk management and protocol optimization. Our prior and current optimization work includes engagements with Arbitrum, EigenLayer, MakerDAO, Morpho, Uniswap, and many others.

[bryancolligan]

It’s been a pleasure working with the gauntlet team.

Very much in support in continuing working with the team and learn something new in almost every interaction.

That being said 4 things we would like more help with this year are:

1. A path to profitability on every market in which fees are greater than incentives spent
2. Helping drive quicker governance process in limited scenarios. This way market configs applied in 24-72 hours vs the current 8 day turnaround.
3. Data driven guidance on assets and markets to list that have 50MM TVL or 500k fees generated potential the Growth team may miss
4. A path to more leverage. 7 different integrations and yield products have asked for higher borrow collateral factors to be able achieve higher leverage and more loops.

I encourage the rest of the community to engage give feedback and support this initiative.

[Gauntlet]

Thank you, Bryan, and the AlphaGrowth Team. We value your support and look forward to continuing our productive collaboration. We appreciate your feedback and are happy to incorporate these priorities for the coming year. Please see more notes below:

1. We will work closely with the community and AlphaGrowth to advance towards profitability for the Comets. While we have been initially focused on optimizing for TVL growth, we can align with the community on prioritizing profitability as the key metric, especially for more mature Comets.

2. We agree on the need for a faster governance process. We will continue to collaborate with community contributors to expedite this, allowing for more dynamic risk and growth optimizations.

3. Although not directly within our immediate risk management scope, Gauntlet can provide proactive, data-driven guidance in this area. We have been delivering analysis on asset listings and Comet/asset recommendations, such as the DAI Comet Recommendation and LRT/LST Listings. We can prioritize this aspect more highly moving forward.

4. We acknowledge the trade-offs between risk and growth, and we will provide the community with analysis to support informed decision-making. One approach is to offer both conservative and aggressive recommendations. Additionally, we are pursuing initiatives to enhance leverage following the implementation of exchange rate oracles. Here is our recent LRT Recommendations.

[DoDAO]

We have been involved in the Compound Ecosystem for the last couple of years and have been really impressed with @Gauntlet 's work. As we add more chains and markets, the work done by Gauntlet becomes even more critical.

We would recommend working on some of the following reports. I am sure Gauntlet already has the data, but many parts of these reports can overlap with the work done by AlphaGrowth (@bryancolligan).

Some reports that we feel can help Compound maintain and improve its position include:

1. Measuring the cost of fees by chain and market. How much COMP is spent to acquire $1 in fees. Along with these data, some recommendations on how to improve.
2. Efficiency of Compound Markets vs. other protocols. What are the base interest rates on the borrow and supply side compared to other protocols? While the net borrow/supply rates can vary based on incentives, Compound should strive to ensure that it offers the best base interest rates at all times for all markets and chains. Along with these data, some recommendations on how to improve.
3. We do have a process for asset listing, but it’s important to have some metrics and processes around the delisting of assets. So, we should try to have a “performance factor” for each collateral for each market, and then based on that information, delist some of the worst-performing assets to help increase efficiency.

Sharing these reports every two weeks on forum and walking through the most important points in the dev calls can help community get insights backed by data.

Another focus area can be Compound’s RWA strategy (this applies to all service providers of Compound and to the community). We have seen Gauntlet being part of many RWA engagements in the ecosystem. It would be great to get some data from Gauntlet which helps objectively decide the focus and effort that Compound should spend on exploring these new market areas.

These are some areas we feel we should target as a community, and data from Gauntlet can help a lot in making decisions objectively.

[Gauntlet]

DoDAO - we appreciate your support and partnership. We are excited to collaborate on initiatives like the ones mentioned below, as well as on streamlining governance processes for parameter optimization.

You are correct that we already have much of the data you referenced internally. We can work with the community to determine the best platforms for publishing this information, whether on the forums, through dashboard features, or other venues. For example, the two charts below illustrate our cost optimization strategy in relation to the growth trajectory of the Comets. As the Comets have expanded, the costs associated with incentivizing them have been gradually decreasing. Our ultimate goal is to phase out these incentives, allowing Comets to generate reserves organically without incurring incentive-related expenses. Providing interest rate curve and rewards recommendations for the comets is within our scope.

Gauntlet is experienced with asset delistings and protocol offboardings, such as our work on Compound V2 deprecation. We are happy to contribute here if the community desires a more formal process for asset delistings.

Regarding RWA and other growth markets, if there are specific markets the community would like us to analyze, we can prioritize those data requests. While our aim is to proactively manage market risk, we are always open to receiving requests from the community that fall within the scope of our work.

[cylon]

As always, OpenZeppelin remains neutral on the selection of vendors for the DAO. However, it is critical to Compound’s operations that it maintain an active risk management program which Gauntlet has provided for multiple years now.

Gauntlet has long been a key player in managing Compound’s financial risk. They are one of the most frequent proposal submitters, serve on the Pause Guardian multi-sig and consistently engage on the forum and community calls.

Personally, I’ve greatly enjoyed working with @Gauntlet team members and would be happy to continue collaborating with them following a successful renewal.

[Gauntlet]

Thank you all for your support and feedback. We aim to publish the on-chain proposal this Sunday. For transparency, we note that due to recent changes in governance, Gauntlet may vote on this proposal even though we typically do not. If you are a delegate and would like to change your delegation, please feel free to do so before this Sunday.

We thank everyone for their participation and continued partnership.

[dmitriywoofsoftware]

It is a pleasure to work with such an experienced team. I really appreciate your efforts in managing so many markets and assets. I like that Gauntlet is always proactive and helps AG meet all the business needs. I would like to see Gauntlet work with Compound for the next year.