MKR Parameter Recommendations:
Gauntlet and Chaos Labs have collaborated and shared our independent analyses for the listing of MKR on V3 Ethereum.
The main differences between the analyses were the supply cap, borrow cap, debt ceiling, and Liquidation Bonus recommendations. Chaos Labs recommended a lower supply cap and debt ceiling, while Gauntlet recommended a lower borrow cap. The joint recommendation was to adopt the lower figures as they are high enough to enable growth and migration from V2 and can be increased at a later stage. Additionally, Gauntlet recommended a slightly higher liquidation bonus which was adopted for the launch.
Below you can find a joint recommendation with the initial parameters followed by the analysis of each party.
| Risk Parameter | Value |
|---|---|
| Isolation Mode | YES |
| Enable Borrow | YES |
| Enable Collateral | YES |
| Loan To Value | 65.00% |
| Liquidation Threshold | 70.00% |
| Liquidation Bonus | 8.5% |
| Reserve Factor | 20.00% |
| Liquidation Protocol Fee | 10.00% |
| Borrow Cap | 1,500 |
| Supply Cap | 6,000 |
| Debt Ceiling | $2,500,000 |
| Variable Base | 0.00% |
| Variable Slope1 | 7.00% |
| Variable Slope2 | 300.00% |
| Uoptimal | 45% |
| Stable Borrowing | Disabled |
| Stable Slope1 | 13.00% |
| Stable Slope2 | 300.00% |
| Base Stable Rate Offset | 3.00% |
| Stable Rate Excess Offset | 5.00% |
| Optimal Stable To Total Debt Ratio | 20.00% |
Gauntlet Analysis
Gauntlet recommends making the following changes to the initial Aave V3 ETH recs for MKR:
| Syntax | Description |
|---|---|
| Liquidation Bonus | 8.5% |
| Supply Cap | 10k |
| Stable Slope1 | 13.00% |
Given that MKR will be in isolation mode and have a debt ceiling, Gauntlet supports the LTV and liquidation threshold increase. However, our analysis shows that a liquidation bonus decrease from the proposed parameters would still properly incentivize liquidators. According to our borrow and supply cap methodology, the proposed would be too high. A 25k supply cap would be reasonable, however, a 10k initial supply cap should provide room for growth and mitigate outsized risk. Of course, debt ceiling changes will also need to consider supply cap changes. The stable slope1 increase keeps the stable and variable interest rate models proportional to the ones suggested here.
Chaos Labs Analysis
Overview
Chaos Labs supports listing MKR in Isolation Mode as part of an overarching strategy to increase the offering of AAVE protocol with more volatile assets. As a low market cap asset, MKR is susceptible to price manipulation, so listing it with an appropriate debt ceiling is crucial to prevent a profitable pump attack.
Liquidity and Market Cap
When analyzing market cap and trading volumes of assets for listing, we are looking at the past 180 days, especially in light of the recent market turbulence. The average market cap of MKR over the past 180 days was $649M, and the average daily trading volume was $29M (CeFi & DeFi). We find the market cap reasonable for listing. While the low trading volumes signal low liquidity in the markets, they can be addressed by the supply caps, debt ceiling, and borrow caps.
Liquidation Threshold
Analyzing MKR price volatility over the past year, we observed daily annualized volatility of 84% and 30-day annualized volatility of 99%. Considering this volatility, we support the suggested LT of 70%.
We support listing MKR as borrowable under reasonable limits of supply cap, as we do not observe a significant risk to the protocol by allowing to borrow MKR, as long as it is bound by a well-defined cap.
Debt Ceiling
Following Chaos Labs’ Isolation Mode Methodology, which we will publish shortly, we recommend an initial debt ceiling of $2.5M. Under the methodology for Isolation Mode, we consider two levels of probabilities for extreme price drops - Medium-High and High. We estimate the MKR probability for an extreme price drop as Medium-High. Given this debt ceiling, we do not identify a profitable attack vector under the current liquidity levels.
Supply Cap, Borrow Cap, and Liquidation Bonus
Following Chaos Labs’ approach to initial supply caps, as introduced with the Metis deployment recommendations, we propose setting the Supply Cap at 2X the liquidity available under the Liquidation Penalty price impact.
We recommend a 7.5% Liquidation Bonus and a derived supply cap of 6,000 MKR, and a borrow cap of 3,300 MKR.
Recommendations
We support the recommendations in the post for the Reserve Factor, Liquidation Protocol Fee, and Interest Rate curves.
Following the above analysis, we recommend listing BAL with the following parameter settings:
| Isolation Mode | Enable Borrow | Enable Collateral | LTV | LT | Liquidation Bonus | Reserve Factor | LPF | Supply Cap | Borrow Cap | Debt Ceiling |
|---|---|---|---|---|---|---|---|---|---|---|
| Yes | Yes | Yes | 65% | 70% | 7.5% | 20% | 0.1 | 6,000 | 3,300 | $2.5M |