Thanks, @ChaosLabs. Our risk analysis did not yield a strong view on the proposed LINK or WAVAX changes. However, we did want to flag the changes for BTC.b and WETH.e. Gauntlet cautions against increasing LT/LTV for BTC.b and decreasing the LT/LTV for WETH.e.
Gauntlet Recommendations
Gauntlet’s analysis disagrees with increasing LT/LTV for BTC.b and decreasing the LT/LTV for WETH.e. Given that in this instance, the current supply for BTC.b (3700) has considerably exceeded both Gauntlet’s conservative (900) and aggressive caps (2800), increasing the LT for BTC.b and decreasing the LT for WETH.e adds risk to less liquid / whale-concentrated assets, decreases the borrowing power of safer and more liquid assets on Avalanche, and has negligible impact on increased borrows and protocol revenue.
- In the event borrow usage increases disproportionately, the onchain liquidity for these collateral assets may not be able to support their liquidation potential.
- These assets’ borrow usage suggests these LT changes will have a negligible impact on protocol revenue (~$925).
Analyzing onchain liquidity provides insight into the risks here. Suppose borrow usage with these assets as collateral actually increases disproportionately (a tail risk that we aim to protect against). Consider the event in which the largest suppliers for each asset decide to maximally borrow against their collateral (which is a possible, permissible action in the protocol). Essentially, we aim to evaluate the ‘potential harm’ this user may cause. Consider the slippage that results from a liquidation sized at this max borrow, adjusted for the initial close factor of 50%.
- BTC.b, largest supplier 0xd275e5cb559d6dc236a5f8002a5f0b4c8e610701
- $28.6mm → max borrow, adjusted for close factor is ~$10mm
- (Also note that 60% of BTC.b supply is on Aave)
- WETH, largest supplier $9mm → max borrow, adjusted for close factor is ~$3.3mm
As shown above, the slippage for BTC.b is meaningfully higher than WETH.e for the respective largest suppliers.
Even though the marginal slippage corresponding to respective LT increases of 3% of the current supply may be acceptably small, BTC.b has the latent potential to become a high VAR asset due to the strong whale presence. Moreover, 60% of the BTC.b circulating supply on Avalanche is supplied in Aave already.
The largest historical liquidations on Aave v3 Avalanche have been < $200k in size. Gauntlet is researching the distribution of liquidations that use on-chain liquidity vs. liquidations that use global liquidity. Until we find sufficient evidence to the contrary, we should not assume a larger base of liquidity (global liquidity) for potential large liquidations that have never historically happened before and should rely solely on on-chain liquidity.
Next, let’s analyze the borrow usage (taken from the Chaos dashboard, as of ~2/12/2023)-
- WETH.e has borrow usage of 46%, BTC.b has 37.8%, LINK.e has 26.5%, WAVAX has 13.8%.
After adjusting for asset CF -
- WETH.e has borrow usage of 47%, BTC.b has 45%, LINK.e has 34%, WAVAX has 15%.
Some of the supplied collateral is unproductive, as in changes to the LT should not rationally impact borrower behavior -
- For instance, roughly 30% of BTC.b borrow is recursive - any additional BTC.b borrow with BTC.b supply is not profitable relative to nonrecursive borrowing. So rationally, this BTC.b supply would not have new associated borrow and is thus non productive.
Assuming users will maintain their (debt / max debt) ratio, where max debt is the maximum debt they can take on with their current supply, we find that the BTC.B LT change could increase borrows by roughly $900k, while the WETH.e LT change decreases borrows by $525k. This is the breakdown by debt (borrow) asset when aggregated together -
which is roughly $370k increase in borrows. At current variable borrow rates of roughly 2.5%, with a 10% RF, this amounts to ~$925 in added protocol revenue per year.
TLDR;
Ultimately, increasing LT of BTC.b while decreasing the LT of WETH.e enables excess risk to less liquid / whale-concentrated assets and only has a small potential benefit on protocol revenue.