Per Gauntlet’s supply and borrow caps methodology, we recommend the following cap increases:
Chain
Asset
Current Supply Cap
Recommended Supply Cap
Current Borrow Cap
Recommended Borrow Cap
Metis
m.USDC
6,000,000
8,000,000
4,000,000
7,200,000
Metis
m.USDT
5,000,000
6,500,000
4,000,000
5,900,000
Metis
METIS
360,000
400,000
32,000
No Change
Motivation:
Gauntlet proposes to increase supply/borrow caps for the assets in order to meet the increasing demand and address the full utilization of stablcoins m.USDC and m.USDT. This recommendation is based on an analysis of on-chain liquidity and user positions, aiming to enhance capital efficiency without introducing excessive risks to the protocol.
Specifications
The recent surge in Total Value Locked (TVL) on the Metis platform can be attributed to the substantial price appreciation of the Metis token. It’s worth noting that this significant price increase hasn’t influenced our recommendation to raise the caps.
Metis Chain TVL
As depicted in the charts below, top asset suppliers on Metis employ highly recursive positions. The incentives within the Metis market are promoting high usage and recursive strategies to obtain high yield. As such, these highly recursive positions create limited risk exposure to the protocol in the event of market risk event.
The asset Metis has a suppy cap usage above 75%. Since the asset does not have collateral enabled and the borrow cap is set at a relatively low 32k, Gauntlet recommends increasing the supply cap.
With an on-chain circulating supply of 20 million for USDC and 16.3 million for USDT, our recommendation to raise their caps is substantiated by both the substantial on-chain circulation of these stablecoins and the recursive composition of large positions.
The caps for stablecoins have now been full for nearly two months. Chaos has refrained from increasing them to date due to the persistently low on-chain liquidity, which hasn’t demonstrated any significant signs of improvement.
It’s apparent that the current usage, primarily driven by users looping the same asset to leverage incentives, poses minimal risk to the protocol. This behavior, while prevalent now, isn’t anticipated to be a long-term trend. This evolution could be impacted by increased caps, particularly as we transition away from current incentive structures to more sustainable practices. Increased caps could potentially constrain future adjustments, potentially influencing our ability to revise borrow caps for more volatile assets or to add new assets for borrowing. Furthermore, it’s important to consider the specific risks associated with METIS borrowing. Its relatively low average market cap in recent months makes METIS prone to significant price swings, as observed in recent weeks, raising the possibility of substantial liquidations under conditions of increased borrowing and sharp price rises. Yet, under the current market conditions and METIS’s borrow caps and distribution, the associated risk is comparatively low.
Given the current caps for the volatile assets (WETH, METIS), we support the proposal to increase the supply and borrow cap for the stablecoins, and the modest increase to the METIS supply cap, as it is a non-collateral asset.
In summary, while we support increasing the supply and borrow caps under the current circumstances, it’s crucial to strike a balance that accommodates present usage but also provides flexibility for future expansion and shifts in user behavior. We will keep a close watch on the Metis market, especially after the incentive period, to ensure our parameters align with the changing market dynamics and risk profiles.
