The proposal aims primarily to facilitate an expansion of the MaticX/WMATIC loop strategy. Generally, we see the value in the proposal and think that, like other loop strategies, the protocol can benefit from it.
There are several areas in this proposal leaning heavier towards the rewards side of the risk-reward ratio, for which we would like to recommend a more prudent and phased approach.
Supply Cap
We generally support increasing the supply cap and providing a low Slope1 on the IR curve to facilitate MaticX/WMATIC loop strategy. However, the proposed increase is too steep at the moment. We believe that a supply cap of 16M, which represents 37% of the total market cap of the token, creates high exposure to MaticX.
Regarding the new Balancer pool, while it may improve liquidity, we recommend waiting for the pool deployment before taking it into account in the analysis. As a general guideline, we should avoid theoretical liquidity and account strictly for what is available on-chain.
With the current utilization of the supply cap at 67%, we recommend an initial increase of 30% to 7.8M. This will allow room to absorb new supply while analyzing the user behavior following the enablement of borrows. Relaxations can be made over time, but only after more liquidity is present, demand is exhibited, and usage patterns become more evident.
Borrow Cap
The use case for arbitrage through borrowing is clear. However, a borrow cap of 6M MaticX, representing over 14% of the total market cap of tokens, seems excessive. Therefore, we propose starting with a lower cap to verify that there is no risky use of borrows and evaluate an increase over time.
We recommend an initial borrow cap of 90K, which is 10% of the highest daily volume ever for MaticX and above p90 of daily volume.
LT/LTV
We recommend leaving the current LT/LTV configuration without change. We do not think the LTV should be increased to that of MATIC (65%) as MaticX, by definition, encapsulates a volatility risk greater than MATIC’s.
The increase in LT and LTV does not promote the loop strategy but instead creates overexposure of the protocol to MaticX, which, together with the liquidity considerations described above, creates a potentially dangerous scenario of bad debt. Increasing these parameters, as mentioned before, should be considered only after borrow usage patterns become more evident.