Gauntlet Market Risk Assessment
In general, per Gauntlet’s Asset Listing Framework, we recommend listing assets without enabling them as collateral in order to observe how usage evolves for supplies and borrows and to derisk any mechanism design issues that could pose an outsized risk to Aave. Once an asset has sufficient time in the market, it can be prudent to enable them as collateral, provided there is sufficient liquidity and community buy-in.
Our analysis considers data including the following to assess the risk factors when recommending parameters:
- Market cap of the token
- Total supply
- Largest liquidity sources (exchanges including CEX and DEX)
- Volatility (30 day, 90 day, 1 year)
- Average daily trading volume on CEX and DEX
- Other DEX metrics
Optimism’s market cap of $228M and 30-day-average daily volume across multiple exchanges exhibits signals of ample liquidity and market interest for the asset. The asset’s level of liquidity in the market reduces the risk of price manipulation attacks.
The volatility of Optimism is relatively high when compared to other assets listed on Optimism v3. OP’s higher levels of volatility should be incorporated when assessing initial parameters.
The largest liquidity sources for OP are Uniswap (DEX) and Binance (CEX).
Gauntlet has performed preliminary price slippage analysis on the OP/USDC swap on 1inch to assess potential slippage. 1inch can handle market orders to sell $2M in OP with less than 10% slippage.
Recommendation
We always recommend listing assets without enabling them as collateral but should the community wish to enable these assets as collateral, our risk analysis recommends more conservative parameters than currently proposed for OP. Below are the recommend changes:
- Lower LTV and Liquidation Threshold to 30% and 40%, respectively. As stated in our asset recommendation guidelines, it is prudent to list assets with conservative parameters with the goal of giving enough time to the asset at a low collateralization ratio to provide clarity that mechanisms are working as intended. The parameters can be updated to the current recommendations as early as 2 weeks after the initial listing, depending on how usage and market conditions evolve.
- The current supply cap recommendation at 40M OP represents 19% of OP’s circulating asset supply. Allowing a high supply on Aave, relative to the circulating supply of the asset, can present several market risks, including liquidation cascades. Gauntlet recommends lowering the supply cap to 20M in order for collateral risk exposure to be less than 10% of the circulating supply. The supply cap may be adjusted higher if market usage deems it necessary.
- Gauntlet recommends listing the asset in isolation mode with a debt ceiling of $2M. Listing the asset within isolation mode will allow the community to evaluate market liquidity and usage without exposing the overall protocol to outsized risk.
