[Gauntlet] Polygon v3 USDC - MaticX Supply Cap Update (10/20/23)

[Gauntlet]

Simple Summary

Our recent Polygon v3 USDC weekly update mentioned that the MaticX supply cap utilization increased from 6.70% to 99.40% on 10/10/23 due to the user with address 0x1e5b92c66e4cad7963e8dacf1e8d642304c172c8 who supplied $3.08M MaticX. The supply cap utilization is currently at 96%.

Gauntlet does not currently recommend increasing the MaticX supply cap.

Analysis

The supply cap utilization for MaticX is currently 96%.

Below are details of the top MaticX suppliers:

Top 10 MaticX suppliers and percentage of total MaticX supplies:

Supply and borrow positions of the top 10 MaticX suppliers:

Top 10 MaticX suppliers and borrow usages:

On 10/10/23, the MaticX supply cap increased from 6.70% to 99.40% due to a contribution by a user with address 0x1e5b92c66e4cad7963e8dacf1e8d642304c172c8. This user supplied 5.5M MaticX tokens ($3.11M), currently accounting for 96% of the total MaticX supply on Polygon v3 USDC. They’ve also borrowed $1M USDC, leading to a 53.7% borrow usage.

The total circulating MaticX on Polygon is 82.48M tokens, with this user holding 6.67% of it.

Given the low MaticX daily trading volume (~$650k), minimal DEX liquidity ($3.36M MaticX/USDC swap incurs roughly 54% slippage), and concentration risk of a large supplier, we do not currently recommend increasing the MaticX supply cap.

This assumption takes a conservative approach and doesn’t account for MATIC liquidity, which could come into play when MaticX positions are absorbed. In such scenarios, MaticX collateral buyers might convert their MaticX to MATIC, utilizing its liquidity. If the community leans towards a higher supply cap for MaticX, we can adjust our recommendation to encompass MATIC liquidity.

When integrating MATIC liquidity into the MaticX supply cap strategy, consider the following:

• Due to low MaticX/USDC liquidity, converting MaticX to USDC can result in significant slippage for buyers.
• While the MATIC/USDC liquidity is more favorable, MaticX purchasers have two main considerations for arbitrage:
  • Unstaking MaticX to revert to MATIC involves a 2-3 day waiting period, making it less appealing for immediate arbitrage.
  • If the purchaser already holds MATIC, they could sell it at the prevailing higher liquidity rates and then initiate the unstaking of their new MaticX.

Increasing the MaticX supply cap comes with its challenges. The chance that liquidators may lack adequate MATIC amplifies the risk of buying MaticX in low liquidity situations.

Next Steps

• Create a poll to gauge community preferences

[Gauntlet]

Creating a poll to gauge community sentiment:

MaticX Supply Cap Methodology

• 1.Incorporate MATIC liquidity into MaticX supply cap recommendations
• 2.DO NOT incorporate MATIC liquidity into MaticX supply cap recommendations
• 3.Abstain

[ignaciorsg.eth]

Hello everyone,

This is Ignacio from Avantgarde.

To minimize risk, we’ve decided against incorporating MATIC liquidity into the MaticX supply cap for now. However, we are open to revisiting this in the long term as there might be potential use cases that we haven’t recognized yet. We believe it might be beneficial to engage with the Stader team to raise these liquidity concerns, especially since they were behind the proposal to list MaticX.

@Gautam_Stader @knight_mayr, your thoughts would be valuable.

[gonemultichain]

I am in favor of including the MATIC liquidity. AFter all, LSTs normally have very deep pools paired with its native coin (stETH / ETH, MaticX / MATIC…). Normally those pools dwarf in liquidity the ones with stablecoin, since they do not have IL risk.

However, from a liquidation perspective, they get the work done.

[crypto_degen]

I am in favor of including the MATIC liquidity.
The liquidity on DEXs is also deeper than mentioned and is currently at ~$5.4M worth of combined liquidity in MaticX based pools across DEXs - Balancer, Quickswap and Retro.

[Dovah]

I am for incorporating MATIC liquidity into the supply cap estimation.

I believe being conservative is a must for Compound and I also share that vision, but this seems excessively conservative, due to the following reasons:

@Gauntlet

minimal DEX liquidity ($3.36M MaticX/USDC swap incurs roughly 54% slippage)

Not sure where are these numbers coming from, but I believe they are not quite accurate. This is the current swap you get in a DeFi aggregator:

Also worth mentioning that stMATIC liquidity depth is considerably worse (46% price impact for the same swap), while their current total capacity is 35% higher than MATICx

Apart from the already mentioned liquidity depth, if the unstaking route previously mentioned were ever to be chosen by a liquidator, Stader would be significantly better, as the unstaking in Lido has to be done in Etherem network vs natively done in Polygon network for Stader.

These are the numbers I came across during my brief research, but happy to be corrected on why are my calculations wrong/different from the previously showcased in the proposal.

[Gauntlet]

Given the results of the poll and considering the preferences of long-time community members and partners of the Compound community, at this time we will not move forward with increasing the MaticX supply cap for the following reasons:

• Elevated Slippage Concerns: Increasing the cap could lead to heightened slippage risks. Currently, a major v3 MaticX holder could cause a 17% price impact if they exchanged their holdings for USDC. An increased cap of $8M might amplify this slippage to an untenable 60%.
• Risk/Reward Consideration: Simply put, doubling the MaticX cap does not offer a proportional increase in benefits when considering the associated risks. The borrows against MaticX will still be relatively low, even if doubling the cap to $8M. Additionally, reducing caps can be challenging once set, particularly if liquidity conditions decline. A temporary increase in MaticX/USDC DEX liquidity does not guarantee its longevity, and assuming liquidators possess MATIC is an uncertain assumption.