[ARC] V3 Supply Cap Recommendations for Uncapped Assets (Fast-track)

The objective of this proposal by Chaos Labs is to recommend supply caps for v3 assets that are currently uncapped. This proposal follows the fast-track process for increasing supply caps as outlined here. It’s important to note that these are initial supply caps for these assets and will be iterated upon. The recommendations for every asset on every chain take into consideration:

  • Asset Market Cap
  • Asset Counter Party Risk
  • Asset Volume
  • Asset Liquidity (DEX and CEX based)
  • Historical Liquidations in times of high volatility

Uncapped Assets

Avalanche

Asset Current Supply Cap Recommendation Current Usage / Recommendation Liquidation Threshold Liquidation Penalty DEX Liquidity*
WETH.e 27.34K ETH 113K ETH 24% 82.5% 5% ~$7M pool
WBTC.e 1.8K WBTC.e 5233 BTC 34% 75% 6.25% $490K pool
LINK.e 317K LINK 353K LINK 90% 65% 7.5% $305K pool
AAVE.e 4.14K AAVE 4.5K AAVE 92% 71.3% 7.5% $238K pool
WAVAX 2.8M WAVAX 13.1M WAVAX 21% 70% 10% ~$25M AVAX-USDC WETH.e-AVAX USDC.e-AVAX BTC.b-AVAX USDT.e-AVAX

Optimism

Asset Current Supply Cap Recommendation Current Usage / Recommendation Liquidation Threshold Liquidation Penalty DEX Liquidity*
LINK 47.3K LINK 258K LINK 18.3% 75% 10% $110K pool
WETH 32.3K WETH 35.9K WETH 89.97% 82.5% 5% $5.35M pool
WBTC 1K WBTC 1.1K WBTC 90% 75% 10% $2.33M pool

Arbitrum

Asset Supply Cap Recommendation Current Usage / Recommendation Liquidation Threshold Liquidation Penalty DEX Liquidity*
WBTC 500 WBTC 2.1K WBTC 23.8% 75% 10% $3.39M pool
WETH 12.6K WETH 20.3K WETH 63% 82.5% 5% $10M pool
AAVE 2.11K AAVE 2.5K AAVE 84.4% 65% 10% N/A
LINK 313.7K LINK 350K LINK 89.62% 75% 10% $967K pool

*TVL of the deepest pool, captured on 11/22/22

10 Likes

It is somewhat surprising to see that WBTC is more liquid than ETH on Arbitrum. But if this is the case, then why is it proposed to have a bigger liquidation penalty, and lower liquidation threshold for WBTC?

Yaron, thank you for your feedback. While writing the forum post, we included the wrong DEX link for WBTC on Arbitrum, which indicated an incorrect TVL - both have now been corrected. The analysis and recommendations are based on the correct underlying data, and therefore the supply cap recommendation holds.

We would like to emphasize once again that this proposal focuses solely on Supply Cap recommendations for uncapped assets. The LTV/LP and LTV in the table reflect the values currently deployed on each network. We’ll be following up with additional parameter recommendations soon to reflect the current market conditions and liquidity better.

1 Like

Ah, I see it was now fixed from $145M to $3.39M.
Very interesting to see that the recommended WBTC cap is higher than the recommended ETH cap, despite reporting over x20 higher dex liquidity for ETH (I assume that for CEX liquidity, ETH liquidity is even much higher than the one of WBTC).

1 Like

We are pleased to see the community taking some important steps to further manage risk by leveraging Aave V3’s embedded risk management features with a robust framework. These conservative initial supply caps appear to be aligned with current market conditions.

7 Likes

Agreed, the cap on BTC is larger than ETH. Here are a few things to note here:

  • There isn’t a linear relation between pool TVL and supply caps as the liquid pools are in Uni v3, where liquidity is provisioned into specific ranges. What’s important here is the available liquidity within the range, such that the slippage is smaller than the liquidation penalty.
  • Because the liquidation penalty of WBTC is significantly higher than WETH, there is more liquidity available within that range, giving us more flexibility in terms of profitable liquidations for liquidators.
  • While DEX Liquidity and liquidation penalties are critical factors in determining supply caps, they are not the only consideration. Our analysis shows that the pace of liquidations for ETH is faster than that of BTC (under relevant market conditions); therefore it will be harder for liquidators to liquidate underwater positions over time during adverse market events.

We’ve validated this model with significant market actors and liquidity providers. Of course, these are all heuristics; but, we choose to over-index on the side of caution.

Supply caps will be an iterative process that reflects market conditions and overall supply utilization. We believe it’s best to be prudent during these times, as we can quickly raise supply caps moving forward as the market evolves and permits.

Fixed a few more links along the way. Again these don’t affect the supply cap recommendations. We’d like this to be available as a template for anyone recommending supply caps moving forward.

4 Likes

Snapshot vote is now live:

https://snapshot.org/#/aave.eth/proposal/0xf40a7b4a6ecd5325553593f0f9fdc8ba04808573fdf76fc277aee52b5396a588

3 Likes

There are snapshot i just took from 1inch (over arbitrum), it seems the liquidity for 5% slippage on ethereum is like x5 bigger than wbtc for 10% slippage. Moreover, almost 70% of the entire recommended ETH cap can be liquidated in a single trade.


I think the community would benefit from more elaborated explanations on how you come up with these numbers.
You present very detailed tables, however, the connection between the tables in this post and the final recommendations is pretty lose. I am sure other considerations were taken into account, and this is how you come up with such a conclusion, but the current post does not shed any light on it.

In particular, the contrast between the avalanche and arbitrum recommendations. Your recommended supply cap for ETH on avalanche is x5 the one you recommend on arbitrum, despite dex liquidity being x5 higher on arbitrum.
I can think of multiple considerations that could justify it, but I you don’t specify any of them in your post.
I think the community would benefit from giving a fuller picture on how this was compiled.

We support this proposal as it will decrease the risk associated with uncapped assets. The parameters are considered conservative which can be change in the future.