[Gauntlet] Risk Parameter Recommendations (02/2025)
Simple Summary
Specification
Liquidation Penalty
| Comet | Asset | Parameter | Current Value | Recommended Value |
|---|---|---|---|---|
| V3 Ethereum USDC/USDT/USDS | WETH | Liquidation Penalty | 5% | 7% |
| V3 Arbitrum USDC/USDT/USDC.e | WETH | Liquidation Penalty | 5% | 7% |
| V3 Optimism USDC/USDT | WETH | Liquidation Penalty | 5% | 7% |
| V3 Polygon USDC/USDT | WETH | Liquidation Penalty | 5% | 7% |
| V3 Ethereum USDC/USDS | wstETH | Liquidation Penalty | 8% | 10% |
| V3 Ethereum USDT | wstETH | Liquidation Penalty | 5% | 10% |
Liquidation Factor
| Comet | Asset | Parameter | Current Value | Recommended Value |
|---|---|---|---|---|
| V3 Ethereum USDT/USDC/USDS | WETH | Liquidation Factor | 90% | 88% |
| V3 Arbitrum USDC/USDT | WETH | Liquidation Factor | 90% | 88% |
| V3 Arbitrum USDC.e | WETH | Liquidation Factor | 85% | No Change |
| V3 Optimism USDC/USDT | WETH | Liquidation Factor | 90% | 88% |
| V3 Ethereum USDC/USDS | wstETH | Liquidation Factor | 87% | 85% |
| V3 Ethereum USDT | wstETH | Liquidation Factor | 85% | No Change |
Collateral Factor
| Comet | Asset | Parameter | Current Value | Recommended Value |
|---|---|---|---|---|
| V3 Ethereum USDC/USDT/USDS | WETH | Collateral Factor | 83% | No Change |
| V3 Arbitrum USDC | WETH | Collateral Factor | 83% | No Change |
| V3 Arbitrum USDT | WETH | Collateral Factor | 85% | 83% |
| V3 Arbitrum USDC.e | WETH | Collateral Factor | 78% | No Change |
| V3 Optimism USDC/USDT | WETH | Collateral Factor | 83% | No Change |
| V3 Ethereum USDC/USDS | wstETH | Collateral Factor | 82% | 80% |
| V3 Ethereum USDT | wstETH | Collateral Factor | 80% | No Change |
Motivation
During the market downturn on February 3, 2025, WETH and wstETH collateral remained unsold for extended periods before being liquidated. A comprehensive and in-depth analysis is available here.
The charts below present the time series of WBTC and WETH collateral prices during key absorption and repayment events for V3 Ethereum USDC comet on Feb 3, 2025. Red vertical lines mark absorption events, while green vertical lines denote collateral purchases by liquidators. The width of each line represents the scale of the liquidation or repayment. The chart highlights that a significant WBTC position was absorbed and repaid predominantly within the same timestamp, whereas WETH absorptions were sometimes repaid over a span of several minutes.
Delayed absorptions also happened for wstETH as shown below.
Analysis
Liquidity Sources
The following table summarizes some liquidity sources for WETH across various decentralized exchanges (DEXs) on Ethereum:
| pool_name | pool_type | pool_url | pool_tvl_usd | volume_24h_usd |
|---|---|---|---|---|
| WETH / USDC 0.05% | uniswap_v3 | Link | $195.08M | $109.78M |
| WBTC / WETH 0.3% | uniswap_v3 | Link | $104.78M | $1.83M |
| WETH / USDT 0.3% | uniswap_v3 | Link | $93.38M | $4.97M |
| WETH / USDT | uniswap_v2 | Link | $48.24M | $980.53K |
| USDC / WETH 0.3% | uniswap_v3 | Link | $47.94M | $5.00M |
| WETH / USDT 0.05% | uniswap_v3 | Link | $34.86M | $36.99M |
| WETH / USDT 0.01% | uniswap_v3 | Link | $6.54M | $58.04M |
| USDC / WETH 0.01% | uniswap_v3 | Link | $4.55M | $53.24M |
The following table summarizes some liquidity sources for wstETH across various decentralized exchanges (DEXs) on Ethereum:
| pool_name | pool_type | pool_url | pool_tvl_usd | volume_24h_usd |
|---|---|---|---|---|
| wstETH / wstETH-WETH-BPT / WETH 0.01% | balancer_ethereum | Link | $34.51M | $7.54M |
| wstETH / WETH 0.01% | uniswap_v3 | Link | $14.40M | $2.62M |
| wstETH-rETH-sfrxETH-BPT / wstETH / sfrxETH / rETH 0.01% | balancer_ethereum | Link | $7.61M | $0.00 |
Volatility Analysis
WETH → USDC
| Metric | Value |
|---|---|
| Min Price Change Log | -10.62% |
| Max Price Change Log | 13.43% |
| Annualized Daily Log Volatility | 66.92% |
| Annualized 30D Log Volatility | 64.95% |
wstETH → USDC
| Metric | Value |
|---|---|
| Min Price Change Log | -10.66% |
| Max Price Change Log | 13.47% |
| Annualized Daily Log Volatility | 67.01% |
| Annualized 30D Log Volatility | 64.95% |
Recommendations
Liquidation Penalty
Gauntlet recommends setting the Liquidation Penalty (LP) for WETH at 7% in the Ethereum USDC/USDT/USDS Comet. To ensure alignment, we also recommend the same LP for WETH in the Arbitrum USDC/USDT/USDC.e Comet, Optimism USDC/USDT Comet, and Polygon USDC/USDT Comet.
Additionally, we recommend setting the LP for wstETH at 10% for the Ethereum USDT Comet.
Collateral Factor & Liquidation Factor
As mentioned here, we advise that Compound introduce a strategic buffer between its Liquidation Penalty (LP) and Liquidation Factor (LF). This buffer not only safeguards users from sudden penalties but also contributes to a more robust risk management framework for Compound.
Gauntlet recommends setting the Liquidation Factor (LF) for WETH at 88% and the Collateral Factor (CF) at 83% in the Ethereum USDC/USDT/USDS Comet. To maintain consistency, we also recommend applying the same LF for WETH in the Arbitrum USDC/USDT Comet and Optimism USDC/USDT Comet.
Furthermore, we recommend setting the LF for wstETH at 85% and the CF at 80% in the Ethereum USDC/USDS Comets.
Next Steps
- Welcome feedback from the community
- Post recommendations to on-chain proposal