Summary
Gauntlet has been tracking the liquidity for UNI USDC v3 Comet and has identified deteriorating liquidity conditions on-chain. Gauntlet recommends the following:
| Metric | Current Value | Recommended Value |
|---|---|---|
| Supply Cap | $57.41M | $20M |
| Liquidation Factor | 81% | 79% |
| Collateral Factor | 75% | 73% |
| Liquidation Penalty | 15% | 17% |
Rationale
UNI’s volatility has surged recently, coinciding with a decline in on-chain liquidity. This trend has prompted a shift towards more cautious parameters to mitigate risks within the protocol. Notably, the 7-day Garman-Klass volatility has reached its peak over the past month, signaling heightened market fluctuations. Moreover, the on-chain 25% depth has seen a substantial decrease, plummeting from $27.7 million to $5.1 million, indicating a significant reduction in available liquidity.
With these market conditions we recommend changing 4 parameters to effectively reduce risk to the protocol.
Supply Cap
Given the above scenarios, Gauntlet recommends decreasing supply cap of UNI to $20M from the current $57.41M. This is backed by the decrease in supply cap usage from 95% in February to 13% today. This reduction is necessary in order to cap the risk.
Liquidation Factor (LF) and Collateral Factor (CF)
Gauntlet also suggests reducing the LF from 81% to 79%. When evaluating the potential impact of recommended Collateral Factor decreases on user positions, we consider several key factors. Firstly, we examine the size of each position, focusing on those with borrow amounts exceeding $5,000. Secondly, we assess the Health Factor of each position, specifically targeting those with Health Factors below 1.17 (indicating Borrow Usage greater than 85%) following the Collateral Factor adjustments. Finally, we analyze how much each position’s Health Factor will change as a result of the Collateral Factor modifications. We prioritize accounts where the Health Factor becomes more than 5% closer to the liquidation threshold due to these adjustments. For instance, if a user’s position predominantly consists of ETH with a Health Factor of 1.1, and only a small portion is in COMP, reducing the COMP Collateral Factor by 5% while leaving the ETH factor unchanged may not significantly affect their overall Health Factor. In such cases, these positions are not included in our analysis.
From the above assumptions, the recommended Liquidation Factor decreases would not currently cause new liquidatable user positions. In line with reducing LF, Gauntlet would like to reduce the Collateral Factor by 2% to 73%.
Liquidation Penalty (LP)
Decreasing on-chain liquidity intensifies slippage challenges, which can erode the profitability of successful liquidations. Notably, the largest UNI-supplying position stands at $1.6 million, with liquidation slippage estimated at 1.32% should it be liquidated. While the existing liquidity pool offers sufficient room for conducting liquidations, Gauntlet suggests a proactive approach to address potential future declines in on-chain liquidity. Thus, we recommend increasing the liquidity pool by 2% to reach 17%. This adjustment aims to accommodate any forthcoming shifts in liquidity conditions and ensure seamless liquidation processes.
