Gauntlet will be voting yes on CP048. This change does two things:
- Updates the Ctoken contracts to a new standard
- Adds in a “protocol cut” for liquidation fees similar to the reserveFactor
Moving the Ctoken contracts to a new standard is great step forward for the protocol, ensuring that all markets benefit from recent CToken changes as well as making future development easier.
Regarding the protocol cut, defined by the protocolSeizeShareMantissa, there are some concerns. This parameter is hard coded and regresses some of the functionality provided by the liquidationIncentive.
The liquidation incentive is an important lever to ensure that even when liquidity dries up and when gas costs are high, liquidators are paid enough to offset slippage, gas, and other costs. At the same time, this is something that effects borrower UX. The safer the protocol gets, the worse it gets to borrow on Compound - any active borrower will occasionally get liquidated and if this fee is unnecessarily high, this could be a disadvantage when trying to grow the protocol and attract more borrowing. Ideally, you are able to change this over time to balance these tradeoffs. If you take 2.8% off the top of the liquidation incentive, it becomes difficult to ever lower it.
Reducing this incentive does increase the risk for the protocol in the case of Black Thursday type events. However, Compound has held up well in recent smaller downturns and the protocol does have the ability to raise this again if it needs to.
While we raise these concerns, we do not believe they are blocking issues for a change that also delivers a lot of positive value to Compound.