ARC: Increase the USDT debt ceiling for the Avalanche V3 Market
At the launch of the Avalanche V3 market, USDT was listed as an isolated asset with its debt ceiling set at $5M. This debt ceiling represents the maximum amount of USD that can be borrowed against USDT as collateral. This proposal aims to increase the debt ceiling for USDT to $75M on the Avalanche V3 Market.
At the time of writing this proposal, here are the relevant metrics and parameters for Avalanche V3 USDT:
- Total supply: $388M
- Utilization rate: 88%
- Available liquidity: $45M
- Debt ceiling: $5M/$5M
- Supply cap: $2B
Given that the current debt ceiling has been met, it is no longer possible to borrow against USDT on the Avalanche V3 Market. The current supply of USDT on Avalanche is over $650M. An increase to $75M would translate to about 20% of the current USDT supply on Aave being permitted as collateral in isolation mode.
Despite the controversy around it, USDT remains the largest stablecoin by market cap with the longest track record of any major stablecoin. The currently supported version of USDT on the Avalanche V3 Market is minted natively and does not carry any associated bridge risk. There is clear demand for the use of USDT as collateral on Avalanche and we believe that increasing the debt ceiling will contribute to a healthier and more active market on Avalanche.
Seems reasonable to me.
Some numbers of Avalanche V3 Market:
- Total market size = $2.71B
- Total Liquidity available = $1.02B
- Total Stablecoin Liquidity available = $162,89M (DAI) + $0.55B (USDC) + $42.47M (USDT) = $766.46M
- Total DAI+USDC Liquidity available = $162,89M (DAI) + $0.55B (USDC) = $711.89M
- Total Stablecoin Liquidity borrowed = $257,25 (DAI) + $1.05B (USDC) +$345,31M (USDT) = $1.65B
- USDT debt = $5M
USDT debt to current total debt ratio = 0.30%
- USDT proposed debt = $75M
- USDT proposed debt to current total debt ratio = 4.54%
- Additional USDT debt the protocol could potentially have after the proposal = $75M - $5M = $70M
- Given the current liquidity of the market, a maximum of 9.81% ($70M / 721.89M) of the stablecoins available liquidity (only DAI and USDC) could be potentially borrowed using USDT as collateral. Then, the protocol would end up with 4.54% of Stablecoins debt against USDT.
Regarding the controversy of the asset, I think that any controversial action could be easily applied if terms of the Safety Module were clearer. Once again, the importance of the SM policy is highlighted.
Thanks for this ARC.
On Aave V3, USDT market metrics have been stable, with a high utilisation around the optimal utilisation rate of 90%.
Given the $440m of USDT liquidity on Aave, even with the x15 debt ceiling increase you are suggesting, I expect it will be reached very fast.
With the high level of utilisation, there is only $42.5m of USDT, available for potential liquidations. So there is not enough liquidity to mitigate the risks of such a high debt ceiling.
Additionally, on 1Inch avalanche it is possible to exchange:
- 30m USDT to USDC with nearly no slippage
- 35m USDT to USDC for 6.5% slippage
- 40m USDT to USDT for 16.5% slippage
- 75m USDT to USDC for 56.5% slippage
I would recommend keeping the debt ceiling below the available liquidity and at a level where the USDT collateral can be liquidated without significant price impact. Then scaling this debt ceiling as the reserve size and available liquidity on Aave grow combined with dex liquidity on Avalanche.