Gauntlet Parameter Recommendations:
Isolation Mode: No
Borrowable: Yes
Collateral Enabled: Yes
Supply Cap (in tokens): 6000
Borrow Cap (in tokens): 940
Debt Ceiling: 0
LTV: 70.0%
LT: 79.0%
Liquidation Bonus: 7.2%
Reserve Factor: 10%
Liquidation Protocol Fee: 10%
One challenge of parameterizing markets with no usage (new markets) is the lack of user data to train simulation models. At a high level, our research has shown that simulations using mock data are inaccurate (due to priors on the mocks not being representative of real-world usage in the protocol). That said, Gauntlet has previously provided wstETH param recommendations for Aave v3 Ethereum, which will serve as the foundation for wstETH initial recommendations on Aave v3 Optimism. We made adjustments to the LTV, LT, Supply Cap, and Borrow Cap from our v3 Ethereum recommendations that we put in place here. Below we detail our rationale and methodology behind each parameter. As a reminder, these recommendations are from a market risk (not smart contract risk) perspective.
Supply Cap / Borrow Cap
Gauntlet recommends reducing the Supply Caps and Borrow Caps by 99% from our v3 Ethereum recommendations to 6000 and 940, respectively. For an initial conservative listing approach, Supply Caps and Borrow Caps are initialized with the liquidity on that chain. wstETH is considerably less liquid on Optimism as compared to Mainnet Ethereum - a sell of 150000 wstETH to WETH on Ethereum yields a 1.5% slippage, compared to 1900 wstETH to WETH on Optimism, a difference of roughly ~99%. These diluted caps help mitigate tail risks while giving the market ample time to naturally evolve and grow. If the wstETH market grows quickly due to its greater use cases compared to stETH, the community can revisit the market’s parameterization accordingly.
Liquidation Threshold / Loan-to-Value
For LTV and LT, we recommend dividing the LTV and LT of our wstETH v3 Ethereum recommendation by v2 WETH LTV (LT) / v3 Optimism WETH LTV (LT). The v3 Optimism WETH LT is 82.5%, compared to 86% on v2. Since the wstETH v3 Ethereum LT and LTV recommendations are derived from v2 Ethereum, this would allow us to initialize Optimism wstETH with the same relative risk profile for stETH on v2 (as compared to WETH). This results in an LT of 79% and LTV of 70% for wstETH on v3 Optimism.
Reserve Factor
Gauntlet recommends wstETH reserve factor be that of the reserve factor on v2 for stETH, which is 10%.
Liquidation Bonus (”LB”)
Gauntlet has recommended LB params for wstETH on v3 Ethereum. For v3 Optimism, we recommend initializing with the same LB for wstETH on v3 Ethereum, adjusted by the ratio between WETH v2 LB and WETH v3 Optimism LB to account for implicit behavioral differences between liquidations on Optimism vs. Ethereum. This results in 7.2%.
Liquidation Protocol Fee (”LPF”)
Gauntlet has recommended a 10% LPF for the LPF of wstETH on v3 Ethereum. For v3 Optimism, we recommend the same. This will allow for protocol revenue from LPF while minimizing effects on liquidator behavior and user experience. The LPF is a percentage of the LB that ultimately contributes to Aave reserves. Ultimately, more data is needed to conduct analysis on what optimal LPFs should be. LPFs, like LBs, are intimately linked to liquidation behavior, as they serve as the primary incentive for liquidators. If LPF is too high (and unadjusted LB), liquidators may be deterred from conducting liquidations due to fears of unprofitability. Likewise, a higher LPF, with an upwards adjusted LB to ensure liquidators have the same bonus as in v2, may cause too much of the collateral to be eaten up by liquidations, which also impacts liquidator behavior.
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