Risk Parameter Updates 2022-03-08

Simple Summary

A proposal to adjust three (3) parameters for 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 eighth of Gauntlet’s regular parameter recommendations as part of Dynamic Risk Parameters.

Motivation

This set of parameter updates seeks to maintain the overall risk tolerance of the protocol while making risk trade-offs between specific assets. Gauntlet recently published a blog post on our parameter recommendation methodology to provide more context to the community.

Our parameter recommendations are driven by an optimization function that balances 3 core metrics: insolvencies, liquidations, and borrow usage. Our parameter recommendations seek to optimize for this objective function. Our agent-based simulations use a wide array of varied input data that changes on a daily basis (including but not limited to, user positions, asset volatility, asset correlation, asset collateral usage, DEX/CEX liquidity, trading volume, expected market impact of trades, liquidator behavior). Our simulations tease out complex relationships between these inputs that cannot be simply expressed as heuristics. As such, the charts and tables shown below may help understand why some of the param recs have been made, but should not be taken as the only reason for recommendation. Our individual collateral pages on the dashboard cover other key statistics and outputs from our simulations that can help with understanding other interesting inputs and outputs related to our simulations.



Symbol Collateral Locked Volatility ADV Collateral Usage Usage/ADV Weighted Avg Collat Ratio
ZRX $57.8M 108% $12.2M $10.9M 89.3% 4.72
MKR $20.7M 112% $18.4M $4.2M 23.0% 4.35
SUSHI $0.4M 107% $48.9M $0.1M 0.2% 1.92

Top ZRX non-recursive supplies and collateralization ratios:

Top MKR non-recursive supplies and collateralization ratios:

Top SUSHI non-recursive supplies and collateralization ratios:

Specification

Our recent market downturn report showed that many collaterals are resilient to insolvencies, as our simulation models have predicted. We will continue to adjust risk parameters to drive increases in capital efficiency while maintaining protocol risk at safe levels. Parameter recommendations are ordered by descending cToken collateral locked.

Parameter Current Value Recommended Value
ZRX Collateral Factor 60% 65%
MKR Collateral Factor 60% 65%
SUSHI Collateral Factor 60% 65%

Note that we are proposing to continue incrementally increasing CFs for both MKR and SUSHI, which are very safe collateral assets with low collateral locked. Their CFs were increased in our most recent parameter recommendations, executed on 2/28.

Dashboard

The community should use Gauntlet’s Risk Dashboard to better understand the updated parameter suggestions and general market risk in Compound.

When making recommendations, Gauntlet takes into account the entire distribution of insolvencies and liquidations from our simulations, and weighs them against increases in borrows. The below metrics give the community insight into some of the insolvency and liquidation tail risks the protocol could face, as well as Capital Efficiency improvements the protocol stands to gain. For more detailed simulation metrics, click the collateral-specific pages linked in the Collateral Risk section.

Value at Risk represents the 95th percentile insolvency value that occurs from simulations we run over a range of volatilities to approximate a tail event.

Liquidations at Risk represents the 95th percentile liquidation volume that occurs from simulations we run over a range of volatilities to approximate a tail event.

Next Steps

While Gauntlet expects to initiate a governance proposal for this set of parameter recommendations on Sunday 3/13 (voting to begin 2 days later), we will cancel the vote should changes in our daily simulations dictate it necessary.

Should 3 risk parameters across 3 assets be updated?
  • Yae
  • Abstain
  • Nay

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