This proposal aims to increase the MaticX Supply Cap on Polygon V3 to match market demand.
Motivation
Increasing the supply cap of Polygon MaticX in the Aave market is a strategic move to accommodate growing demand, and follow a previous DAO decision to maintain aggressive supply caps for correlated assets.
Deposits of MaticX have been over 95% of the supply cap for some time. Increasing the Supply Cap will enable users to continue depositing MaticX and enter the recursive MaticX/wMATIC yield strategy.
The DAO has previously voted to allow assets with correlated borrow supply caps to be up to 75% of cumulative supply. Since this exceeds the supply cap increase allowable by risk stewards, this proposal will increase supply caps through the typical ARFC process. Current circulating supply is over 100M, so this proposal will increase the supply cap to 75M.
Specification
Increase the supply cap for MaticX on Polygon V3 to the following.
MaticX TVL and Circ supply of MaticX on POS has been rising consistently.
Given the current supply on POS is 103M+ , the proposed cap of 75M MaticX is well within the 75% cap approved previously.
Since MaticX is mainly used as collateral for borrowing WMATIC, with approximately 70% of loans against MaticX being WMATIC, the risk of liquidation is considerably low for these positions.
Considering the existing liquidity conditions and user positions for non MaticX/WMATIC holdings, we support a further increase in the caps. A significant portion of these borrowings can be attributed to a specific user, who currently supplies 23.54M MaticX, accounting for nearly 40% of the total MaticX supply. This user has collateralized approximately $32.56M, including $876K in WMATIC, $10.9M in stMATIC, and $20.66M in MaticX. They have borrowed $7.89M, predominantly in USDC.e, resulting in a health score of 2.30.
The user at address 0x1e5b92c66e4cad7963e8dacf1e8d642304c172c8 supplies $20.32M in MaticX and $10.72M in stMatic, borrowing $7.17M in USDC.e and $0.72M in USDT. Our LST supply cap methodology recommends a cap at 50% of LST’s total supply, assuming its predominant use in eMode. For non-LST assets, we recommend a supply cap that allows for 25% slippage on DEXs. Currently, the $20.32M MaticX supply causes 85% slippage on DEXs. This user is well-collateralized with a Health Factor of 2.4, although positions may change; thus, we avoid over-relying on specific user positions under stable market conditions.
Raising the supply cap from 62M to 75M would enable an additional $11.2M in MaticX supply. If a user supplies this amount and borrows up to 92.50% LTV, equivalent to $10.36M in wMATIC, with the average wMATIC Borrow APY at 2.75% and a reserve factor of 20%, this would generate approximately $57k in annual wMATIC reserve growth for the protocol.
Despite the potential from both recursive and non-recursive MaticX suppliers, our methodology advises against raising the cap. Instead, increasing the wMATIC Reserve Factor would be a lower risk avenue to increase wMATIC reserve growth, given wMATIC suppliers are likely inelastic to a slight decrease in their 1.3% supply APY, and rather care more about their borrowing power.
