Simple Summary
Gauntlet recommends the following risk parameter updates for the Ethereum v3 USDC comet:
UNI
- Increase UNI Liquidation Penalty from 7% to 15%
- Increase UNI Supply Cap from 6,000,000 to 8,000,000
WBTC
- Increase WBTC Liquidation Factor from 77% to 85%.
- Increase WBTC Collateral Factor from 70% to 80%.
Analysis
Gauntlet recommends raising UNI’s supply cap and liquidation penalty to balance risk management and capital efficiency.
UNI Top Suppliers
The table below shows how the increase in the liquidation penalty reduces exposure to UNI price deprecation post-absorption. We used an example of the largest supplier of UNI with ~$9M supplied.
| Outcome | Current UNI LP of 7% | Recommended UNI LP of 15% |
|---|---|---|
| UNI Absorbed by Compound | $9M | $9M |
| USDC Owed to Borrower (after liquidation penalty) | $9M × (1 - 7%) = $8.37M | $9M × (1 - 15%) = $7.65M |
| USDC Previously Borrowed | $7.3M | $7.3M |
| Additional USDC Paid by Compound | $1.07M | $350k |
| Break-even UNI Sale Price for Compound | $8.37M | $7.65M |
| Post-absorption UNI Price Drop to cause insolvency | 2.09% | 6.59% |
WBTC Top Suppliers
Following Gauntlet’s review of Compound V3’s liquidation mechanism, we’re enhancing WBTC’s Liquidation Factor (LF) to boost capital efficiency without elevating protocol risk. The leading WBTC supplier has $143M in collateral with a health factor of 2.52, and existing CEX and DEX liquidity levels are adequate to manage the offloading of this position should it become subject to liquidation.
Gauntlet recommends increasing the Collateral Factor for WBTC users to increase 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