Gauntlet has conducted an initial market risk analysis on the parameterization of the wETH Comet market.
stETH
Our systems observe ample liquidity in the stETH/wETH market. The slippage/liquidation curve suggests that a $130mm market sell of stETH through 1inch only incurs 1.5% slippage, implying a liquid market. We also ran simulations hypothesizing the amount of insolvencies and liquidations given various CFs and stETH/ETH deviations for accounts that have historically supplied stETH and borrowed wETH - and found that only at high deviations is there a likelihood for insolvencies.
Because of this, it can prudent to initialize the market at $100mm supply cap, 90% CF (collateral factor), 93% LCF (liquidation collateral factor), and 5% LF (liquidation factor). Combining capital-efficient borrowing parameters with a stringent supply cap will be valuable to understanding and studying the pool behavior.
cbETH
We recommend a lower supply cap for cbETH but with the consistent CF/LCF/LF parameters as wstETH.
cbETH is less liquid on DEXes compared to wstETH (1.5% slippage for $1.3mm sell of cbETH, versus $130mm sell of wstETH). cbETH is also not very liquid on CEX - where a $1mm sell incurs roughly 2% slippage. In addition, cbETH is only redeemable to locked ETH on Coinbase, whereas wstETH is redeemable to stETH, which is more easily transferable and more liquid. There exists a 2-3% discount on cbETH, perhaps due to this intransferability.
However unlikely, we may imagine a situation in which insolvency news on the CEX leads to the cbETH market rate plummeting, creating risk for Compound. Although this existential risk is neither a market risk nor a quantifiable risk, a conservative supply cap can mitigate the potential loss posed to Compound.
Specification
- wstETH: $100mm supply cap, 90% CF, 93% LCF, and 5% LF
- cbETH: $10mm supply cap, 90% CF, 93% LCF, and 5% LF
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