[ARFC], Gauntlet recommendation to lower stMATIC, MaticX non-emode LT, pt 2

Governance
4

Hey @ChaosLabs, thanks for the feedback here. As a risk manager, Gauntlet’s updates to stMATIC / MaticX LT are meant to be proactive to risk, instead of reactive. The risks we have identified include the following.

  • increased stablecoin borrowing against LST collateral amidst low Matic LST liquidity
  • decreased WMATIC supply for Polygon v3

  1. It is difficult to see immediate changes in WMATIC supply composition after a short duration and a relatively minor change, as you pointed out. However, just because supply trends have not formed yet, does not mean that there is lower likelihood of them forming in the future.

  2. Thanks for pointing out the depositors of WMATIC are driven by potential yield, which is pretty common for any other token. They are also driven by the ability to borrow against their WMATIC collateral. We also agree that increased borrowing demand elevates supply APY for WMATIC. However, supply APY at the kink for WMATIC, even with the current interest rate regime of slope1 = 6.1%, Uopt at 75%, RF at 20%, is 3.7%, which is lower than the APY for both STMATIC (4.3%) and MaticX (4.7%).

    • This WMATIC Supply APY will decline to 3% at the kink should AIP-370 pass.
    • As such, for a user interested in MATIC exposure but looking to borrow stables, it is strictly more profitable to supply stMATIC / MaticX to borrow stablecoins. This may lead to risk in declining WMATIC collateral usage, which is what this proposal is meant to proactively mitigate.

  3. The user that we have collectively noted replaced ~25m WMATIC collateral with stMATIC collateral against stablecoins. This was 35% of the ~70m WMATIC supplied in Polygon v3 at the time. Again, echoing from above, lack of trend today is not indicative of future behavior.
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  4. We’ve continuously pointed out the low liquidity levels of Matic LSTs both in the original post as well as here. Based on our Matic LST liquidity data, as of now there are only ~1.4m WMATIC in pools against stMATIC on Balancer, when historically there were > ~$20m TVL in liquidity pools. A similar amount exists for MaticX as well.

    A cursory scan of 1inch shows that a 3m sell of MaticX or stMATIC incurs > 30% slippage. Current supply of MaticX and stMATIC on Polygon v3 are each ~40m, implying that ~24m worth in stables could be borrowed in total. As market moves upwards and user risk appetite increases, potentially leading to increased borrowing against MATIC LST collateral, these lower liquidity levels may increase in risk especially when drawdowns occur.

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Summary

  • Gauntlet stands by these parameter recommendations given the analysis above.
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