Following the implementation of Exchange Rate Oracles, we have refreshed the risk recommendations for the following LRTs with amended Collateral Factor (CF), Liquidation Factor (LF) and Liquidation Penalty (LP). These recommendations can be imposed on all current and future LRT listings on **WETH v3 Comets**.

Asset | Current CF | Recommended CF | Current LF | Recommended LF | Current LP | Recommended LP |
---|---|---|---|---|---|---|

weETH | 80% | 90% | 85% | 93% | 8% | 4% |

rsETH | 80% | 88% | 85% | 91% | 10% | 4% |

ezETH | 80% | 88% | 85% | 91% | 10% | 6% |

## Rationale

Referencing the previous formula to calculate Liquidation Factors, the use of exchange rate oracles make the volatility component redundant.

Collateral Factor = 1 - (Liquidation Penalty + Annualized Market Rate Volatility)

Given the insulation to market rates, liquidation penalties don’t need to account for slippage and can be set lower allowing more capital efficiency. We recommend setting the Liquidation Penalty to create sufficient incentive for liquidators to enact and create a risk-free arbitrage opportunity.

### Liquidation Penalty (LP)

Using both Absolute Mean Deviation (AMD) we can determine the deviation of Market rate oracles to Exchange rate. This metric summarizes the overarching market’s valuation of the LRT relative to its true value.

Given below are the maximum downward deviation of market rates with respect to exchange rates.

Asset | Maximum deviation between rates |
---|---|

weETH | -2.02% |

rsETH | -2.3% |

ezETH | -3.75% |

We recommend setting the LP to the Floor(2* Maximum negative deviation), to provide ample buffer and sufficiently incentivise liquidators.

Asset | Liquidation Penalty |
---|---|

weETH | 4% |

rsETH | 4% |

ezETH | 6% |

### Liquidation Factor (LF)

We suggest using Median Withdrawal Ratio as a factor to calculate Liquidation Factor. A low median withdrawal ratio suggests users typically withdraw small amounts relative to their deposits. This could allow for a higher LF, as it indicates lower liquidity pressure. On the contrary, a high median withdrawal ratio indicates users frequently withdraw larger portions of their deposits. This would necessitate a lower LF to ensure the protocol has sufficient liquidity buffer. The ability of the protocol to absorb withdrawals along with general directional demand for inflows/outflows is a suitable proxy for overall protocol risk.

LF = 1 - (Liquidation Penalty + f(Median Withdrawal Ratio))

Where,

f(Median Withdrawal Ratio) = k * log(1 + Median Withdrawal Amount/Average Total Deposits)

With k = 1, we get the following Median Withdrawal Ratio

Asset | f(Median Withdrawal Ratio) | Round(f(Median Withdrawal Ratio)) |
---|---|---|

weETH | 3.12 | 3 |

rsETH | 3.82 | 4 |

ezETH | 5.07 | 5 |

With the above we derive the below Liquidation Factors; We recommend ezETH to have an LF of 91% despite the higher Median Withdawal Ratio as the Liquidation Penalty already provides sufficient buffer.

Using the above equation, we arrive at the following Liquidation Factors

Asset | Liquidation Factor |
---|---|

weETH | 93% |

rsETH | 91% |

ezETH | 91% |

The recommended values for Exchange Rate Oracles reflect the increased stability and predictability of exchange rates compared to market rates. The tighter spreads between CF and LF reflects the same. The lower Liquidation Penalties are justified by the reduced need to account for market volatility and slippage.