Gauntlet <> Compound Renewal

Summary

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’s current engagement with Compound runs through September 27, 2022.

Background

For the past three years, Gauntlet has worked with Compound to maximize the protocol’s capital efficiency given an acceptable level of market risk.

Over the past year, Gauntlet has delivered the following:

In the two years prior to this past year, Gauntlet worked formally and informally for Compound to perform market risk assessments, contribute to treasury management, optimize incentives, calibrate risk parameters, and upgrade the protocol.

Results
Over the past year’s engagement, Gauntlet increased collateral factors for the majority of assets while incurring no major insolvencies despite large market crashes. As a result, borrowers increased their utilization, which generated an additional $5.15m of borrow interest income and an additional $96m+ in total borrow. For more details and further reading, click here.

Proposal

Scope
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 agent-based simulations are constructed analogously to how transaction-level backtesting is done in high-frequency and algorithmic trading. Gauntlet’s platform provides similar statistical power in these actuarial analyses by modifying these techniques to handle the idiosyncrasies of cryptocurrencies.

Continued support for Compound II

  • 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
  • Market conditions will determine the frequency of updates. For that reason, no SLA will be preset

[New] Gauntlet will support Compound III, integration is in progress

  • Compound III introduces new mechanisms that pose opportunities and challenges as they relate to managing market risk and optimizing capital efficiency, such as a different composition of user positions and risk profiles, updates to reserve size due to the new liquidation mechanism, and new parameters to manage risk with greater granularity.
  • 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, Borrow Cap, Collateral Safety Grade, [New] Supply Cap, [New] Target Reserves, [New] Store Front Price Factor, [New] Liquidator Points

Out of scope

  • Protocol development work (e.g., Solidity changes that improve risk/reward)
  • Formalized mechanism design outside of the supported parameters
  • Gauntlet will not look to manage the following at the outset: enabling or disabling a currency for borrowing, optimizing COMP emissions

Duration
1-year engagement (Sept 28, 2022 to Sept 28, 2023)

Expectations

Outcomes
Gauntlet aims 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.
  • Borrow Usage: provides information about how aggressively depositors of collateral borrow against their supply. Defined on a per asset level as:
    where U is the utilization ratio of each user:

    Gauntlet aggregates this to a system level by taking a weighted sum of all the assets used as collateral.

Communications

  • 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
  • Risk Dashboard (refer to the next section)
  • Market Downturn Risk Reviews to provide a detailed retrospective on market risk

Dashboards

As part of this engagement, Gauntlet will update the Risk Dashboard for Compound III to provide key insights into risk and capital efficiency for the community. The dashboard focuses on both the system-level risk in Compound and the market risk on an individual collateral level. Our goal is to help convey our methodology to the community and provide visibility into why Gauntlet is making specific parameter recommendations. Updates to the current dashboard include an updated UI and historical views of protocol statistics, including (but not limited to) total supplies and borrows, collateral usage, and customer acquisition and retention metrics.

Cost

Gauntlet charges 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.

The service fee structure will be the same as the previous year’s engagement. The quarterly performance fee is calculated per the following formula: log(Number of Assets, 10) * Total Borrow * Marginal Base Fee tier bps / 4

  • Total Borrow is calculated as the 30-day average and rounded down to the nearest $1B. Given that Total Borrow adjusts based on market volatility (e.g., Compound’s total borrow is down ~88% YoY), this metric provides strong alignment with our clients as we are both incentivized to grow this metric, and it allows our service fee to adjust with our clients’ growth.
  • When Total Borrow < $2B, there is no basis point fee. In this case, the formula is log(Number of Assets,10) * $1,200,000 / 4 ) — this is effectively the “minimum fee.” As of this posting on August 30th, there are currently 16 assets and ~$1B in Total Borrow. To provide an example - if the quarterly fee were calculated today, it would be $361k (~$1.45m annually).

[New] 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 (30% of the minimum fee) will be transferred from Compound in a lump sum COMP transfer to an on-chain Polygon vault. Funds will be converted and actively managed by Gauntlet to manage the potential backstop.
  • 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 Gauntlet risk parameter (excluding Reserve Factor) proposal fails during the engagement.
  • Should losses occur, Gauntlet 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 Gauntlet’s Finance team, and no longer eligible for a refund.

Payment Method:

  • Payment currency will be the same as our prior engagement - denominated in COMP at 30d VWAP. Gauntlet has yet to sell any COMP, but note that we may do so in the future for tax, operational, or other company requirements.
  • For the insolvency refund, 30% of the minimum fee will be paid in lump sum fund transfer, at the start of the engagement and deposited in a vault.
  • The remainder of the minimum fee will be paid via a year-long Sablier stream.
  • Any additional fees beyond the minimum fee will be calculated at the start of each quarter and will be paid via lump sum fund transfer, at the start of the quarter, following a governance vote.

Next Steps

Please share any comments or feedback below. We are targeting to submit a governance proposal by Sunday, Sept 18.

About Gauntlet

Gauntlet is a simulation platform for market risk management and protocol optimization. Our prior and current optimization work includes engagements with Aave, MakerDAO, Sushi, Synthetix, BENQI, and many others.

8 Likes

As I have closely followed Gauntlet’s offering during the past year, and interacted with them on several occasions so that their engagement brings more value to the community, here’re my thoughts:

  • Gauntlet presents quantitative rigor to most of their analyses. They frame the problem in terms of a math equation, which is quite insightful. Latest example.
  • Having a party dedicated to risk management is very desired for a leading DeFi protocol like Compound, and I believe that Gauntlet has done a good job during the past year.
  • Their dashboard is unintuitive and not friendly for users not well-versed in risk management. My understanding is that they are working aggressively to make improvements. I’m looking forward to the upgrades.
  • My biggest concern has been with respect to the transparency of their models. I urge them to look for ways to explain their models, processes, simulation sequences with inputs & outputs better. Move from the current engagement model that is mostly predicated on “Trust”, towards “Trust, but Verify”.
  • Even so, the “Trust” placed by the community didn’t fail us the past year - the protocol didn’t incur insolvencies despite market volatility.

It’s nice to see that they will provide risk management for Compound III too, and will also have some “skin in the game”.

Based on the above, I would vote “yes” to renew their engagement.

6 Likes

We (Blockchain@Columbia) agree with @RogerS’s statements above. Gauntlet’s commitment to solving parameter optimization problems by generating models specifically for the Compound protocol is quite valuable.

For a student group like ours, where leaders often change and new entrants must be quickly brought up to speed, Gauntlet’s posts with clear rationale and models for each recommendation are quite helpful. We also benefit from the availability of the Gauntlet team to communicate on proposals/questions when they arise.

We plan to vote “yes”

To comment on the one criticism raised above, we do agree that more transparency & higher levels of community understanding for most of the models would be positive. There is material that exists on this front (as Paul dove into in the Background–>CommunityUpdates section) but most of that is fairly technical. It would be beneficial to release some type of content (videos, shorter posts, threads) that would be more easily accessible to a wider group of potential community members.

5 Likes

We Blockchain at Berkeley (calBlockchain.eth) are super excited to have Gauntlet advising governance on risk during the launch of Comp III. We believe the service Gauntlet provides to Compound is critical to the safety and solvency of the protocol.

We are excited about the possibility of Gauntlet making their risk assessments more accessible and understandable by governance. More clarity on the inputs/conditions of models, reduces trust when the analysis is too complex and unclear for voters with to understand fully, comprehend, and verify the relevance of Gauntlets simulations. We hope this can be done in an accessible way where most users can begin to understand the nature of the models.

We believe Gauntlet’s insolvency refund mechanism will additionally align Gauntlet with the success of Compound, and makes us much more comfortable voting “yes” to continue this partnership.

We are happy to support.

4 Likes

Thank you, @RogerS, @blockchaincolumbia, and @devenmatthews / Berkeley, for your feedback and support. We are looking forward to increasing transparency and community understanding. Recently, we launched the below in light of those efforts and will keep the community posted on our updates:

As a reminder, we will publish an on-chain vote on Sunday, 8/18, and voting will begin on Tuesday, 8/20. One day before the on-chain vote (Saturday), we will return to the forums with the latest market data to calculate the service fee, which will be used for the on-chain proposal.

2 Likes

The metrics as of Friday, 9/16/2022 are:

  • 30-Day Average Total Borrow: $948,996,468
  • Assets: 16
  • COMP 30-Day VWAP: $50.8

Using the table above and the minimum fee, the annual fee is $1,444,944, which equates to 28,444 COMP Tokens using the 30-Day VWAP. 30% (8,533 COMP) will be paid in lump sum fund transfer. 70% (19,911 COMP) will be paid via a year-long Sablier stream. We will publish the on-chain proposal later today.

1 Like

Hi @pauljlei ,

The following dashboard: Metabase, includes Compound VIII or only V2 at the moment?

Thanks in advance, and I find it really helpful.

1 Like

I look forward to voting for Proposal 125.

Over the past year, Gauntlet has set the bar for a professional organization performing services for a protocol, and I expect that their services will continue to improve.

  1. The Compound protocol has benefited from their risk management: across the board, collateral factors have increased, without accruing bad debt or losses–even during extremely volatile market environments.
  2. The quantity (and quality) of their reporting and dashboards is improving.
  3. They are helping the community safely transition into Compound III on Ethereum (and beyond).
  4. The renewed service fee is competitive, and by including an “insolvency refund”, significantly more aligned with the success of the protocol. This could (should) become a best practice for all protocol services.

Disclosure: in my personal capacity, I work closely with the CEO of Gauntlet in a venture fund that we manage, Robot Ventures. Robot Ventures holds a small stake in Gauntlet. I have campaigned for and against Gauntlet proposals in the past, and do my best to stay objective when evaluating Gauntlet, especially as it relates to compensation.

4 Likes

Thank you, @rleshner, for your support and feedback. We look forward to supporting Compound III’s continued growth and success.

We appreciate your feedback, @dcota. The dashboard currently includes Compound II, but we look forward to adding Compound III in the near future.

As a heads up, voting for our proposal begins ~12 PM PT today.

1 Like

Gauntlet has been a valuable partner for Compound, and their risk management strategies have proven to be helpful across a broad spectrum of market conditions. I’m looking forward to seeing the updated Risk Dashboard and continued engagement for Compound III moving forward. Additionally, the Insolvency Refund is a creative way to align incentives in the event of downside risk.

Overall, I’m excited for what’s to come and appreciate Gauntlet’s efforts in improving their dashboards and reporting standards as they continue to grow alongside their partners.

2 Likes