Simple Summary
For Phase 2 of the Compound v2 deprecation, Gauntlet recommends decreasing the Collateral Factor for lowly supplied (< $4M TVL) v2 collateral assets.
Specifically, Gauntlet recommends the following changes:
- Decrease cAAVE Collateral Factor from 73% to 68%
- Decrease cCOMP Collateral Factor from 60% to 55%
- Decrease cLINK Collateral Factor from 79% to 74%
- Decrease cMKR Collateral Factor from 73% to 68%
- Decrease cSUSHI Collateral Factor from 67% to 62%
- Decrease cYFI Collateral Factor from 75% to 70%
- Decrease cZRX Collateral Factor from 65% to 60%
In this September 2022 snapshot vote, the community voted that each asset’s Collateral Factor may be reduced by an absolute percentage of up to 5%. After our analysis, we recommend this max 5% decrease for each lowly supplied collateral asset. Note the cAAVE Collateral Factor decrease poses the most significant Health Factor decrease, resulting in the Health Factor of a position that supplies $366k cAAVE (46.3% of total cAAVE supply on Compound v2) decreasing from 1.15 to 1.07.
Additionally, Gauntlet recommends continuing to raise the v2 USDC Reserve Factor to incentivize v2 USDC suppliers to migrate to v3. Specifically, Gauntlet recommends:
- Increase v2 USDC Reserve Factor from 30% to 45%
In our recent poll, the community voted to deprecate v2, excluding USDT and DAI. So, for now, we do not recommend raising USDT or DAI reserve factors.
Analysis
Risk-off Liquidations
The recommended Collateral Factor decreases would not currently cause new liquidatable user positions.
Relevant Users with Low Health Factors
When determining what user positions will be most affected by the recommended Collateral Factor decreases, we assess the following:
- Size of the position
- Health Factor of the position
- How much the position’s Health Factor will change due to the Collateral Factor changes
1) Size of the position
We only include positions that have > $5k borrows.
2) Health Factor of the position
We only include positions whose Health Factors are less than 1.17 (Borrow Usage greater than 85%) after the Collateral Factor decreases.
3) How much the position’s Health Factor will change due to the Collateral Factor changes
We only show accounts that become > 5% closer to becoming liquidatable due to the Collateral Factor decreases. For example, a user may have a position with a Health Factor of 1.1, with 99% of their supply in ETH and 1% in COMP. In this case, leaving ETH Collateral Factor unchanged and decreasing COMP CF by 5% will not significantly impact this user’s Health Factor. As a result, we will not show these types of positions.
User Analysis
The below figure shows the top 4 highest borrowing user positions whose Health Factors are less than 1.17 (Borrow Usage greater than 85%) and become > 5% closer to becoming liquidatable after the Collateral Factor decreases.
The table below shows all positions > $5k borrows whose Health Factors are less than 1.17 (Borrow Usage greater than 85%) and become > 5% closer to becoming liquidatable after the Collateral Factor decreases.
| User Address | Total Supply Balance (USD) | Total Borrow Balance (USD) | Initial Borrow Usage | New Borrow Usage | Initial Health Factor | New Health Factor | % Closer to Liquidation |
|---|---|---|---|---|---|---|---|
| 0x53633c539d8399acbfac8e0f2391b35ee4cd6439 | $366.8k | $233.2k | 87.09% | 93.5% | 1.148 | 1.07 | 49.65% |
| 0xc6a58d687d67eda6451a2f55da49104c8326497d | $122.5k | $89.9k | 90.03% | 90.7% | 1.111 | 1.103 | 6.72% |
| 0x43cbe06ae877d257fd4f46b9247aec4c004f3d0e | $62.3k | $42.2k | 86.29% | 87.36% | 1.159 | 1.145 | 7.8% |
| 0xcf4ddbe475ed5683ed4dd0a6afb101dda4a45be2 | $31.5k | $21.4k | 84.9% | 89.04% | 1.178 | 1.123 | 27.42% |
| 0xc7f8689d426975ed7f97f304e512f54c0fde8d02 | $26.5k | $17.8k | 85.39% | 87.2% | 1.171 | 1.147 | 12.39% |
| 0x8e445422baa49c7b98645e918577de7d48280384 | $24.6k | $16.6k | 87.0% | 89.15% | 1.149 | 1.122 | 16.54% |
| 0x87279585d52f534a2d2e453518cd7890c5762d19 | $15.5k | $11.7k | 93.49% | 94.04% | 1.07 | 1.063 | 8.45% |
In total, these positions have $432k borrows.
Note that the position with address 0x53633c539d8399acbfac8e0f2391b35ee4cd6439 has the largest borrow position at $233.2k and is most affected by the Collateral Factor decreases. Their Health Factor decreases from 1.148 to 1.07, becoming 49.65% closer to liquidation due to the CF decreases. This is because the user’s supply is composed entirely of $366.8k cAAVE (46.3% of total cAAVE supply on Compound v2) instead of a combination of cAAVE and other blue-chip tokens. AAVE utilization on v2 is only 5.78%, so a potential liquidation would not cause a liquidity crunch. Below is a time series of this user’s borrow usage over the past month. Purple bars correspond to dates when this user updated their position. Their borrow usage in the past day decreased from 95.0% to 87.1% due to an increase in the price of AAVE.
We will continue to rerun these liquidation analyses and update the community if the Collateral Factor decreases cause any risk-off liquidations and/or relevant Health Factor decreases.
USDC Reserve Factor Changes
v2 USDC Earn APR is currently 2.67%, and the Earn Distribution is 0%, resulting in a Net Earn APR of 2.67%.
For comparison, the Ethereum v3 USDC Earn APR is 3.00%, and the Earn Distribution is 1.36%, resulting in a Net Earn APR of 4.36%.
Increasing the v2 USDC Reserve Factor from 30% to 45% at the current utilization will decrease the (Net) Earn APR from 2.67% to 2.10%.
Next Steps
- Create a poll to gauge community preferences.
