To achieve sustainability, Compound must combine value creation under favorable market conditions with protection of itself and its users when conditions become unfavorable .
Compound must be able to lower the collateral factor of collateral assets to reduce the risk it and its users face under those adverse conditions.
Collateral factor reductions can impact users in a number of ways. In particular, if a user’s account health is low, this type of parameter change can render the account eligible for liquidation.
If a user rebalances their position ahead of a collateral factor reduction, they will avoid liquidation. For this reason, Gauntlet will provide notice to the community via communication channels that may include the forums and Twitter, among others.
That said, there is always some chance that a user will not monitor their account or fail to supply collateral in time, resulting in “risk-off liquidations”.
It is important that the community explicitly aligns on a desired maximum reduction to collateral factors per Compound proposal, as “risk-off liquidations” impact the user experience.
Community input is also valuable because limits on CF reduction impose an important trade-off:
- A lower max CF reduction will minimize the impact to borrowers but at the cost of reducing the rate at which risk can be taken off. This, in turn, limits the extent to which leverage can be increased during favorable conditions, making Compound less capital efficient and coming at the cost of borrow volume.
- A higher max CF reduction will strengthen Compound’s ability to maximize capital efficiency under favorable market conditions but increase the potential for risk-off liquidations.
A Snapshot vote will be published with the options being the following: Per Compound proposal, each collateral asset’s collateral factor may be reduced by an absolute percentage of up to:
- 5% (see point (2) above)
- 1% (see point (1) above)
- This limit would not apply under severe conditions, such as a contract vulnerability.
- It would apply to all collateral assets Gauntlet supports, including ETH, WBTC, DAI, &c. .
- Targeting a Snapshot vote on Wednesday, August 31.
 Please find a detailed explanation of Gauntlet’s Risk Management methodology here.
 A complete list of currently supported assets can be found here.