A proposal to adjust four (4) total parameters across four (4) Compound assets.
This proposal is a batch update of risk parameters to align with the Moderate risk level chosen by the Compound community. These parameter updates are the third of Gauntlet’s regular parameter recommendations as part of Dynamic Risk Parameters.
This set of parameter updates seeks to level set assets to a Moderate risk level of the protocol while making risk trade-offs between specific assets. Note that some are different from the original risk level consensus check as market conditions have changed.
In order to react to changing market conditions, our analysis recommends decreasing the collateral factors for BAT and ZRX while increasing collateral factors for ETH and DAI. Both BAT and ZRX have increased in volatility and decreased in volume since our last parameter changes. As shown on our dashboard, these changes will slightly increase VaR, but the corresponding increase in borrow usage is substantial.
We also would like to provide color on how our simulations have incorporated the changes implemented by Proposal 49. Proposal 49 transfers 2.8% of a liquidation to cToken reserves, which decreases the effective liquidation incentive for liquidators to 5.2%. Liquidators will only liquidate an unsafe position if the expected costs (e.g. slippage of the collateral asset) are less than the liquidation incentive. The majority of assets liquidated in simulations are USDC, DAI, and ETH, which are all very liquid assets and thus still result in profitable liquidations. The net result of Proposal 49 for those liquid assets is positive - all unsafe positions are still liquidated and more collateral goes to Compound reserves. In addition, because of the lower effective liquidation incentive, less collateral hits exchanges when liquidators sell the collateral, thus marginally decreasing cascading liquidation risk. We would note that for the less liquid assets, there was a slight increase in liquidation volume and insolvency, but the net effect of Proposal 49 was beneficial.
|Parameter||Current Value||Recommended Value|
|DAI Collateral Factor||75%||80%|
|BAT Collateral Factor||65%||60%|
|ZRX Collateral Factor||65%||60%|
|ETH Collateral Factor||75%||80%|
See below volatility and exchange volume data from November 17th that were important drivers for the updated parameter recommendations.
|Symbol||11-17 Volatility||11-03 Volatility||Volatility Change||Weekly Average Daily Volume Change (%)||Collateral Usage (USD)|
Gauntlet has launched the Compound Risk Dashboard. The community should use the Dashboard to better understand the updated parameter suggestions and general market risk in Compound.
As shown below, this set of parameter updates will slightly increase VaR, but meaningfully increase borrow usage.
While Gauntlet expects to initiate a governance proposal for this set of parameter recommendations on November 18th, we will cancel the vote should changes in our daily simulations dictate it necessary.