Simple Summary
A proposal to adjust two (2) parameters for two (2) 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 tenth 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 results related to our simulations.
Top 30 Non-Recursive Aggregate Positions
Top 30 Non-Recursive Borrowers Entire Supply
Top 30 Non-Recursive Borrowers Entire Borrows
| Symbol | Collateral Locked | Volatility | ADV | Collateral Usage | Usage/ADV | Weighted Avg Collat Ratio |
|---|---|---|---|---|---|---|
| MKR | $20.06M | 89% | $19.35M | $4.26M | 22.0% | 4.44 |
| AAVE | $2.45M | 117% | $57.52M | $0.49M | 0.9% | 3.96 |
Top MKR non-recursive supplies and collateralization ratios:
Top AAVE 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 |
|---|---|---|
| MKR Collateral Factor | 65% | 70% |
| AAVE Collateral Factor | 65% | 70% |
Note that we are proposing to continue incrementally increasing CFs for both MKR and AAVE. The majority of MKR users have a relatively small amount of collateral locked, except for one whale account, which has $16.4M MKR supplied with a 5.01 collateralization ratio. AAVE users also have a low amount of collateral locked. The largest AAVE user has $1.15M AAVE supplied with a 7.5 collateralization ratio. Our simulations show a low likelihood of insolvency for both symbols. Increasing CFs will continue to incentivize users to supply these symbols as collateral and borrow more against their positions.
Dashboard
The community should use Gauntlet’s Risk Dashboard to understand better 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 and Capital Efficiency improvements the protocol stands to gain. Click the collateral-specific pages linked in the Collateral Risk section for more detailed simulation metrics.
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.
These changes result in 1 bp of increased Borrow Usage given the current TVLs and will improve long-term capital efficiency as the protocol grows and more users supply MKR and AAVE. This set of parameter updates is not expected to increase Value at Risk.
Next Steps
While Gauntlet expects to initiate a governance proposal for this set of parameter recommendations on Sunday, 4/24 (voting to begin 2 days later), we will cancel the vote should changes in our daily simulations dictate it necessary.