A proposal to adjust three (3) total parameters across three (3) Compound assets.
Abstract
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 fifth of Gauntlet’s regular parameter recommendations as part of Dynamic Risk Parameters.
Motivation
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.
Specification
As shown on our dashboard, these changes will slightly increase Value at Risk, but will also increase borrow usage and long-term reserves.
Parameter
Current Value
Recommended Value
WBTC2 Collateral Factor
65%
70%
BAT Collateral Factor
60%
65%
LINK Collateral Factor
65%
70%
The increase in reserves as a result of these increases in CFs is $286K, broken down as follows:
Results are calculated using the below user behavior assumptions in response to the CF updates. We would note that we are monitoring actual on-chain elasticity and comparing it to these assumptions.
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, VaR has increased considerably since our last recommendations, up to over $1B. This is mostly due to increased market volatility and lower collateralization ratios amongst the top borrowers. We note however that all the VaR is projected to be liquidations that can be safely absorbed by the market. This new 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 today, we will cancel the vote should changes in our daily simulations dictate it necessary.
Thanks for your question, @miscao . Our models tune risk parameters according to capital efficiency and risk. As market conditions change we need to make this tradeoff to ensure that Compound gets higher capital efficiency in safer times, and lower risk in riskier times. This may mean that collateral factors can increase and decrease depending on market conditions.
Thanks, @rleshner . Proposal 72 was not intentional - we realized the bug after the proposal was put up, but knew that increasing CF for legacy WBTC wouldn’t have a negative impact on users. Increasing CF for WBTC (New) was the intent. Agree that this is a reminder to the community to deprecate WBTC Legacy over time.
Intuitively it doesn’t seem productive to adjust BAT from 65 to 60 back to 65? Adjusting a CF down is already an uncomfortable event and raising immediately back sets a poor precedent. Unless there is evidence to support this change, I’ll vote no on the proposal and look for it to be reposted without the BAT change.
Thanks, @getty . At a high level, dynamic risk parameters fine-tune risk parameters in accordance with market conditions. This may mean that at some times, more aggressive collateral factors are recommended, whereas at other times, lower collateral factors are warranted. At the time of lowering BAT from 65% to 60%, BAT market conditions were riskier than they are now, especially in terms of volatility. Volatility for BAT has decreased by around 40 percentage points since late November. Our models have since determined it is safe to increase CF back up to 65%.
I agree - this frequent changing of parameters is a turn off for end users. Maybe we can think about doing this quarterly. This reminds me of fixed vs floating rates, in which case the user should have an option to lock themselves in or not. Changing the rules while the game is in play isn’t attractive IMO.
