[Gauntlet] Polygon USDC.e Risk Recommendations (03/25/2024)

Simple Summary

Gauntlet recommends the following risk parameter updates for the Polygon v3 USDC.e comet:

  • Increase WBTC Liquidation Factor from 75% to 85%
  • Increase WBTC Collateral Factor from 70% to 75%
  • Increase WBTC Liquidation Penalty from 5% to 10%
  • Increase MATIC Liquidation Factor from 70% to 80%
  • Increase MATIC Liquidation Penalty from 7% to 10%
  • Increase stMATIC Liquidation Penalty from 15% to 20%
  • Increase MATICx Liquidation Penalty from 15% to 20%
  • Increase WETH Liquidation Factor from 82.5% to 85%
  • Increase WETH Collateral Factor from 77.5% to 80%

Analysis

WBTC Top Suppliers

Based on our analysis of Compound’s liquidation mechanism, Gauntlet recommends raising the liquidation factor and liquidation penalty to enhance capital efficiency for WBTC. Last week, position 0xe67ca5d had $2.1M WBTC collateral absorbed, prompting multiple liquidators to efficiently handle the liquidation.

3/15/24 Liquidation Analysis

Topline metrics include:

  • Collateral (USD) absorbed: 3.29M
  • Base tokens received from liquidators (revenue): 3.17M
  • Base tokens paid to absorbed users (losses): 3.11M
  • Base tokens remaining in protocol (reserve growth): 62.41K
  • Percentage reserve growth: 1.90%
  • Aggregate liquidation penalty: 5.40%

Above is a time series of the changes in Polygon v3 USDC collateral asset price drops, with vertical dashed lines corresponding to absorption events.

Above is a time series of the collateral (USD) absorbed per minute, broken down by symbol. The absorbed amounts were:

  • $2.13M WBTC
  • $0.498M WETH
  • $0.654M WMATIC

Above is a time series of the USDC repaid by collateral buyers per minute, broken down by symbol bought. The WMATIC and WETH were both fully repaid in the first two minutes post-absorption, and the greater WBTC absorption was fully repaid in the first 6 minutes post-absorption.

Above is a time series of the USDC repaid by collateral buyers per minute, broken down by collateral buyer. Various collateral buyers took part in the liquidation.

Above is a time series of the base tokens owned by the protocol over the course of the liquidation. The protocol netted $62.4k USDC as a result of the liquidation.

Presently, Gauntlet advises increasing the WBTC liquidation penalty to better incentivize liquidators in case a significantly larger WBTC positions is absorbed.

MATICx and stMATIC Slippage Curves

The liquidity path of stMATIC and MATICx to USDC.e isn’t robust relative to the current outstanding supply on the protocol.

As shown in the table below, most MATICx and stMATC collateral is concentrated into 2 large positions with relatively safe health factors of 3.37 and 2.28. As a precaution to preventing potential insolvencies the protocol in the event these positions were to be liquidated, Gauntlet recommends increasing the liquidation penalty to 20% for MATICx and stMATIC.

Top Maticx and stMATIC Supplier

Top MATIC Suppliers

Via the Gauntlet’s review of the liquidation mechanism, Gauntlet recommends increasing the Liquidation Factor to 75% to improve capital efficiency and maintain the collateral factor at 65% based on our methodology. Gauntlet recommends increasing the liquidation penalty to 10% in the event of any large MATIC liquidations. The current position at 0xab92fc holds $6.5M in collateral with a Health Factor of 1.48. Swapping the full amount of $6.5M of MATIC to USDC.e would result in approximately 15% slippage.

Top WETH Suppliers

Gauntlet recommends raising the Collateral Factor and Liquidation Factor for WETH to enhance its borrowing utility. There is demand for WETH as collateral on the Polygon chain which this initiative aims to grow on the USDC.e Comet that currently has a supply of $5.3M in relation to the $586M circulating on-chain.

Collateral Factor Methodology

We recommend increasing the Collateral Factor of each asset to offer users increased 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:

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Next Steps

Target on-chain vote 04/01/24

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On-chain proposal has been published here

The proposal was executed here. We thank the community for their participation.