[ARC] Stablecoin Volatility Risk Parameter Recomendations

Governance
25

Gauntlet Market Update (3/12/2023 11:30PM ET)

Overview

In our previous update (12:30PM ET), Gauntlet communicated that we no longer recommended pausing additional markets, unless the price of USDC dropped to $0.91.

Additionally, while the Treasury, Federal Reserve, and FDIC have stepped in to insure the deposits for SVB and Circle’s other key banking partners, we are still waiting for markets to open and prices to stabilize before we will resume normal operation. In the meantime, we will continue monitoring and driving the other initiatives below.

Gauntlet’s estimate of USDC redemption rates by custody provider

Key Metrics

Key Risks

1 - Price dip and recovery

If the price dips and recovers, liquidations will only process on the way up. Rational liquidators will not take on USDC collateral until they are confident they can unload it. This is exactly what we saw play out in the last dip on Friday and Saturday - you only get adverse liquidations

Many Aave community participants expect USDC to eventually recover to close to a dollar. If price drops below 0.91, adverse liquidations could exacerbate insolvency in e-mode markets like Avalanche. If we see the price of USDC drop to 0.91 cents again, we propose pausing all stablecoins on Aave V3 markets that have emode (Arbitrum, Optimism, Avalanche, and Polygon) which will stop liquidations on all assets. Most importantly Avalanche and Polygon need to be paused if this situations occurs.

2 - Price stabilizes at a lower level

In the case that the price falls and stabilizes well below a dollar, we do not expect liquidations to process normally given current liquidity levels. In this case, the protocol will suffer a loss, but there is little to do here except freezing the stablecoin markets, which already has been done.

Current Gauntlet Recommendations

No action is recommended right now. Several markets are on standby.

vn Market Total Market Size New Bad Debt Status Recommendation Notes
V3 Ethereum $0.62B $0 No Changes Made No action needed
V3 Avalanche $0.36B $259,000 - Stablecoin LTVs set to 0

- Stablecoins frozen

Standby See below
V3 Polygon $0.18B $3,000 No Changes Made Standby
V3 Arbitrum $0.104 B $22,000 No Changes Made Standby
V3 Optimism $0.087B <$1000 No Changes Made Standby
V2 Ethereum $6.03B $10,000 No Changes Made No action needed
V2 Avalanche $0.055B $0 No Changes Made No action needed
V2 Polygon $0.205B $0 No Changes Made No action needed

For Avalanche:

  • Loss due to adverse liquidations after USDC price recovery. Changes summarized here. If USDC price begins to drop again, we may want to disable liquidations on USDC if possible. Otherwise, when prices stabilize, we can turn the market back to full functionality

Current Initiatives

Initiative Status ETA Updates
Market Monitoring In Progress 3/14/23 PM* Market montioring is part of our Risk Management service. We are monitoring all markets closely and will notify stakeholders as markets change.
Risk Recommendations In Progress 3/14/23 PM* We will continue to provide recommendations to the Guardians as conditions change in case drastic action needs to be taken.
Calls to explain risk with stakeholders Complete 3/11/23 AM
Initial Analysis Complete 3/10//23 PM Our initial analysis was complete early evening on 3/10 and communicated to stakeholders as soon as we verified e-mode liquidations might fail.
Initial forum post Complete 3/10/23 PM Link
Update for forums, 3/12 Complete 3/12/23 PM Link
  • * This is the current best guess for when we will get clarity on USDC value - we will monitor and provide recommendations as necessary beyond that date
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