USDC Collateral Factor increase to 85%

There is a new proposal to increase the CF of USDC from 75% to 85%. With significant onchain liquidity and a static value, it is safe to increase the CF of USDC from its original CF of 75%. USDC has proven to be a reliable asset and has reasonable operators. Increasing will the CF will likely draw more users to the platform and increase utilization.

If you agree, please delegate votes to the CAP.

Any comments regarding the proposal are welcome to post feedback in this thread.

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Community member @aaaaaaaaaaaaa posted the in the goverance channel of discord: “I think governance voters should demand some better justification for this (and any) change than just your personal beliefs. At a minimum some objective data on why this is safe should be required”

First off, I think proposals are based on personal beliefs and understandings of the protocol/ecosystem. I also believe that voters should vote on their personal beliefs. Because I am the one submitting the proposal, I think the onus on justifying the change is on me. On the same note, it is up to voters to do their own research and ideally independently arrive at their own conclusion.

I appreciate @aaaaaaaaaaaaa criticism, and I will strive to do better.

On that note, let’s talk about USDC.

There are currently 2.8B USDC in existence.

  • 14.5% (408M) of the supply is in Makerdao (Vat).

  • 11.3% (320M) of the supply is in Uniswap’s ETH/USDC pool.

  • 6.7% (136M) of the supply is in BarnBridge.

  • 3.2% (90M) of the supply is in the Curve DAI/USDC/USDT pool.

  • 2.9% (82M) of the supply is in Compound.

  • 1.8% (51M) of the supply is in Aave.

  • 0.80% (22M) of the supply is in Uniswap’s WBTC/USDC pool.

There are many other ETH/USDC pools on other platforms and altcoin/USDC pools. I recommend looking at the top token holders of USDC to see the liquidity.

The circulating supply of USDC has skyrocketed this year.
YTD the supply is up 548% and the unique holders are up 388%.

With 1inch and Matcha, anyone can see the liquidity that exists right now for any market.

  • DAI-USDC: better liquidity on 1inch or Match than any exchange.

  • ETH-USDC: 0.20%-0.40% slippage on $1m trade. (Still better than a lot of exchanges when counting fees)

  • WBTC-USD: 0.40%-0.80% slippage on $1m trade.

The onchain liquidity that exists today is significantly higher than when Compound v2 launched. None of this accounts for the liquidity that large liquidators have deployed or can deploy quickly. Historically liquidators used their own funds to take part, but thriving AMMs and money markets like Compound & Aave have changed the liquidity landscape and made algorithmic liquidators more tenablele.

USDC liquidity (and many others) has improved significantly. With all of this evidence, it is time to vote to increase the CF for USDC.

Here is a list of resources to do your own research:

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The problem is not with USDC in this case, but with the borrowed asset,
in case someone borrows ETH, WBTC or any volatile asset with USDC collateral, then the USDC collateral would simply not have enough buffer to cover the liquidation in case a sudden price change in the borrowed asset.

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with 85% collateral factor the collateral is 17%~ higher than the borrowed amount.
the liquidation incentive is 8% so the buffer is left with 9%
9% is very low and we have seen in the past that it is possible to change in an instant this amount.

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The liquidity landscape has changed drastically since the last massive downturn in March. I think it is more than reasonable to say there is liquidity to perform liquidations safely and timely. That being said, is there a number between 75% and 85% that you would consider safe to adjust to? Since you are one of the key players in Compound Goverance, I value your feedback.

my concern has nothing to do about liquidity

if you would want a reasonable answer what would be safe then a statistic about what was the maximum percentage change in price in a short amount of time lets say 2 minutes in the assets that Compound supports.

@getty this hypothetical example might help to see why this is dangerous. And high liquidity actually makes things more dangerous than less dangerous, because with high liquidity, full positions can be liquidated without any capital. (using just flash loans and on-chain trades).

Lets say collateral percentage becomes 85% for USDC.

  • User deposits 100 USDC to compound
  • User borrows 85 USDC worth of UNI. Lets assume at this moment price of 1 UNI is 5 USDC, so user ends up borrowing 85 / 5 = 17 UNI.
  • Lets now say that the price of UNI suddenly jumps to 6 USDC.
  • Liquidator comes along and liquidates whole 100 USDC position for:
    100 / 1.08 / 6 = 15.43 UNI. (1.08 comes from 8% premium that liquidator gets).
  • Compound protocol ends up losing: 17-15.43 = 1.57 UNI.

Similar thing can be happen with any other borrowable asset too. (i.e. ETH, WBTC, etc).

So this proposal creates significant extra risk for every user who has deposited non USDC, non stable coin assets to Compound, so it must come with very significant benefits to be worth accepting.

Your argument is mostly valid. With an increased CF, the protocol is certainly taking on more risk. That being said, the protocol is also taking a risk by not offering competitive CFs/assets. I think it is fine that Compound Finance generally lists fewer assets and typically more supported assets, but it should offer more leverage to its users in exchange.

Your example with the USDC/UNI isn’t entirely realistic. The assets on Compound should not being moving 20% in an instant, and if that is possible, I would be voting to delist that asset (I imagine you would as well).