This change increases the Collateral Factor of WBTC from 60% to 75%.
On October 1st, Proposal 24 was passed to raise WBTC’s Collateral Factor from 40% to 60%. According to Defi Pulse, on October 1st, there were ~$1B of WBTC in circulation. Today there are $4.38B of WBTC in circulation. In addition to having a much larger supply today, WBTC liquidity has significantly grown since Proposal 24 was passed.
In addition to growing liquidity on decentralized exchanges, centralized exchanges are continuing to adopt WBTC. Shortly after Proposal 24 passed, Coinbase added WBTC markets. As well, Binance continues to be a growing hub for WBTC/BTC trading.
With the significant increase in WBTC circulation, liquidity, and infrastructure, it is safe for Compound to increase Collateral Factor to 75%. From a growth/business standpoint, AAVE currently has its Collateral Factor set to 75%. Compound Finance needs to remain competitive to avoid losing market share.
Although the WBTC is not trustless, by holding the token in protocol, we have already taken that risk. Increasing collateral factor may have only positive implications for protocol.
My main concern with upping the collateral factor here is the inherent price volatility in WBTC and BTC more generally. (W)BTC can easily move 30% percent in a few days. As an extreme example, I think BTC moved 20%+ on March 12th 2020 alone. We might run the risk of more forced liquidations than we’d like with a Collateral Factor at 75%.
If price volatility of BTC or ETH force liquidation (global market price, not Coinbase market price), I will call it “healthy liquidation”.
I am more concerned when stablecoin have a volatility of 30% (on one oracle).
Compare losses from that event with DAI manipulation event where people lost around 90 million.
I would interpret these 15% higher collateral factor as additional protection against liquidation. Because if the borrowed amount will remain the same, this move is excellent protection against liquidation.
Just chiming in here. I fully agree an increase in the WBTC collateral factor is due but think it’d be ideal to go to 70% first. Regardless, I will still support 75% if it comes up to a proposal.
We (Gauntlet) want to provide some needed context on our vote and messaging around it.
We ran stress tests, and the current parameters for WBTC are pretty aggressive. Most of the risk of insolvency in the protocol comes from large WBTC positions:
Net Value Insolvent measure the relative risk to the protocol from each asset pool. We pull live liquidity data from centralized and decentralized exchanges as well as the current collateral positions to ensure this value reflects the best available information.
The Compound WBTC pool has many times more WBTC than other protocols, creating higher BTC risk in Compound. While Compound can increase its capital efficiency for borrowers of other assets, this current change increases the risk of overall protocol insolvency substantially.
We made a mistake yesterday when casting our vote and are unable to change it. We’re building infrastructure now to ensure that future votes are always verified and cast as intended. We’ve voted without issue on almost every other proposal and are looking forward to completing tooling that makes sure this doesn’t happen again.
We’ll be making a new proposal soon with collateralFactors for each asset type that are supported by our stress tests that should increase the capital efficiency for less risky assets. Community proposals like this one are great see, and we want to support community-driven initiatives any time we can. It was a tough decision not to support his proposal, as supporting the community and increasing the capital efficiency of Compound are causes we are very much behind. We’d love to increase the WBTC collateralFactor but our analysis doesn’t justify this change.
More info on how our stress test models Compound and liquidation spirals can be found in our report.
You guys supported the CAP proposal from the beginning. I find it hard to imagine that you voted “Yes” by accident. It isn’t easy to make that kind of mistake, and you quickly voted for this proposal when it went live. You had given the community every reason to believe you supported this change until now.
Even reading your post, your concerns are unclear.
I don’t see how other protocols success/utility has a factor in Compound Finance’s decision making. What matters is if the liquidators can safely handle WBTC being used as collateral. We have more than enough evidence to support this.
While your report shows your processes, it does not mention WBTC once.
In general, we try to vote quickly so other people can read our analysis before voting. After we realized we set the wrong bool value, we were hoping there was some way for us to change our vote (we even tried to call castVote again, but as you might know, that will fail), but we were unable to find a way, so posted here to clarify.
"I don’t see how other protocols success/utility has a factor in Compound Finance’s decision making. " - The risk to Compound’s solvency is mostly due to liquidation failures. The quantity of an asset on Compound increases both the likelihood of a liquidation spiral as well the size potential loss in the case a spiral occurs. Maker, which has a limit of just over $200mm for WBTC, just has to sell less WBTC in the case the price drops, and carries less risk*.
Our report focuses ETH but the methodology can be applied to any asset, and we pull live market data for each asset that we stress test to ensure our model is as accurate as possible.
Sadly, WBTC != BTC, especially not over short timescales. It has less than 1% of the BTC market cap and ~5% of the trading volume. WBTC is different than other assets in that people can create/redeem it from BTC (I think we talked about this on Discord a little while back). This might help create more liquidity for the asset, but we haven’t incorporated this functionality into our models yet. We hope to do this soon, however because BTC block confirmations are pretty slow, and liquidation spirals happen quickly, it’s unclear the impact this would have on recommended collateralFactors.
*All other things being equal, which they are not since Maker uses auctions for liquidations. This is why in our stress tests, we run the actually Compound contracts in a modified version of geth to ensure these nuances are handled correctly.
The top 10 cWBTC users are over 69% of the total cWBTC use. These users are well collateralized, intelligent, and fast-acting. These are NOT the people we need to worry about. The primary reason to increase the collateral factor is for when the market does go down, it gives a little extra breathing room, and it is great for people interacting with the protocol programmatically and can run close to the CF limit while constantly adjusting to avoid liquidation. An 8% liquidation penalty and another 17% of cushion are more than enough wiggle run.
