[ARFC] stMATIC Supply Cap Increase Polygon v3

Governance
1

title: stMATIC SupplyCap Increase Polygon v3
shortDescription:Increase SupplyCap stMATIC on Polygon v3 from 21.0M units to 25M units.
author: @Llamaxyz - @TokenLogic
created: 2023-04-03

Summary

Llama proposes increasing the stMATIC Supply Cap on Polygon to facilitate an expansion of the stMATIC/wMATIC loop strategy.

Abstract

The utilisation of the stMATIC reserve has reached 74.4% and this proposal seeks to increase the SupplyCap to 25M units up from 21M units.

Increasing the SupplyCap will enable users to deposit stMATIC and enter the recursive stMATIC/wMATIC yield strategy.

The proposed Supply Cap for stMATIC is limited by the 50% of circulating supply concentration consideration within both Chaos Labs and Gauntlet methodologies. By sharing the proposal early, this publication hopes to encourage migration of stMATIC from Ethereum to Polygon enabling the Supply Cap to be extended beyond 25.0M.

Motivation

Over the previous months, Llama has been working with various communities to craft favourable conditions on Aave v3 Polygon to facilitate the creation of several yield aggregation products. The below proposals details are applicable to stMATIC:

This proposal is a continuation of the above work.

Using the Chaos Labs Updated Supply and Borrow Cap Methodology the stMATIC Supply Cap can be increased from 21.0M units to 25.0M units. This represents approximately 50% of stMATIC Circulating Supply on Polygon, round to the nearest million units.

If the total circulating supply was used in the above calculation, then the new Supply Cap could be as high as 40.0M units. And, if we used the 1% price impact swap size, 90% of the deposit liquidated via 15% price drop methodology, then the new Supply Cap would then be limited by the max 2x increase, generating a new Supply Cap figure of 42.0M units.

Screenshot 2023-04-03 at 20.51.48
Screenshot 2023-04-03 at 20.51.481450Ă—1044 160 KB

Looking at Gaunlet’s aggressiv methodology, trading volume is not the highest on LSTs and if we focus on liquidity, then a 2% price impact on a swap is around 15.7M units of stMATIC. Multiply this by 10x then the Supply Cap can be increased considerably. This is largely due to the calculated oracle feed making it not practical to influence spot pricng to to manipulate the oracle.

With reference to the new ARFC Aave V3 Caps update Framework it is possible to ship several upgrades to gradually increasing Aave’s exposure to stMATIC over time.

Specification

The following risk parameters have been proposed by Llama for the community to review and discuss in the comments section below.

Ticker: stMATIC

Contract: polygon: 0x3a58a54c066fdc0f2d55fc9c89f0415c92ebf3c4

Parameter Current Value Proposed Value
SupplyCap 21.0M units 25.0M units

Copyright

Copyright and related rights waived via CC0.

1 Like
2

We support the proposed increase of the supply cap to 25M units

1 Like
3

Hi @ChaosLabs,

Reviewing the MaticX proposal, linked here, the Supply Cap was revised based upon on-chain liquidity considerations and not the Circulating Supply on Polygon in light of supply on Ethereum.

Would it be possible to revise the stMATIC Supply Cap based upon on-chain liquidity. If so, then the new Supply Cap could be doubled as the Calculated Ratio exceeds 2.0.

4

We cannot support the proposal to increase supply caps further than the originally proposed 25M units, based on Ethereum liquidity.

Based on our observations, we have not witnessed bridged liquidity being used in times of volatility to liquidate underwater positions. In fact, most liquidators have a zero-risk exposure preference, utilizing on-chain liquidity and flash loans to liquidate underwater positions. While we appreciate the consideration of Ethereum liquidity, we do not have any supporting data to suggest that bridged liquidity would be a reliable in times of market stress.

Therefore, we support a more prudent supply cap increase, until more asset liquidity enters the Polygon ecosystem before considering any further increases. We constantly monitor liquidator behaviors, and if we observe any patterns that suggest considering cross-chain liquidity, we will update our approach accordingly.

5

Per Gauntlet’s Methodology, we would suggest the following conservative and aggressive supply cap recommendations for stMATIC:

Asset Conservative Aggressive
stMATIC 10,000,000 25,000,000

For our Aggressive recommendation of 25M, the supply cap for stMATIC would be set at 50% of its circulating supply on the Polygon chain.

6

Inflows of stMATIC has a strong upwards trend overall with the occasional large holder depositing and providing a further boos. The chart below shows Supply Cap utilisation over time.

Screenshot 2023-04-23 at 13.53.39
Screenshot 2023-04-23 at 13.53.391371Ă—565 36.2 KB

Looking at how this affects wMATIC demand, there is a net inflow of wMATIC over time. However, this net inflow is not correlated with a net outflow from v2 into v3.

Screenshot 2023-04-23 at 13.57.26
Screenshot 2023-04-23 at 13.57.261325Ă—639 39.4 KB

To sustain the ability to attract wMATIC deposits, the Supply Caps of stMATIC and MaticX need to enable users too deposit an LST and enter into the yield maximising strategy. Incentives from Lido and others, will likely stop when the Supply Cap prevents further product adoption for the respective community. This will adversely affect Aave’s ability to attract users and put those communities who build yield products on Aave in a difficult situation as the structured products will not be able to rebalance or improve there health factor with additional LST deposits.

8

Hi Everyone,

With the Snapshot vote determining the community preference to have a Supply Cap of up to 75% of the supply of the LST on the respective network, @Llamaxyz would like to propose increasing the Supply Cap of stMATIC from 21M units to 37.5M units.

Parameter Current Value Proposed Value
SupplyCap 21,000,000 units 37,500,000 units

If a risk advise can confirm this, we will resubmit our PR to @bgdlabs for review with the incorporation of the new Supply Cap.

9

While stMATIC shares similarities with MaticX as an LSD in terms of its calculated price feed, it is presently being utilized on Aave as collateral to borrow stablecoins rather than being leveraged for the underlying asset (MATIC).

Notably, four of the top five wallets utilizing stMATIC as collateral are borrowing USDC and USDT. For more information regarding these wallets, refer to the Chaos Labs Risk Monitoring Platform (wallet 1, wallet 2, wallet 3, wallet 4)

Screen Shot 2023-04-25 at 2.51.54 PM

Therefore, in this case, the primary considerations in our risk analysis are liquidity and price volatility of the underlying asset, and not counterparty risk, which is what the community voted on this past weekend.

We do not recommend increasing the supply cap to more than 50% of the total circulating supply at this time.

As discussed in a separate thread, a potential solution that will allow more aggressive caps would be incorporating distinct supply caps for E-Mode categories.

10

I’m a bit confused by this post.

While stMATIC shares similarities with MaticX as an LSD in terms of its calculated price feed, it is presently being utilized on Aave as collateral to borrow stablecoins rather than being leveraged for the underlying asset (MATIC).

Why is this a problem? When using stMATIC as collateral to borrow anything non-matic-correlated you will not be in eMode so the 65% lt applies. So with 10% LB(quite huge) the protocol would accumutable bad debt once the price of MATIC would suddenly fall by more then 25% before liquidators kick in - do i read this right?

Does this mean you consider the 65% outside of eMode as “to risky” in regards to MATIC price volatility?

How does:

As discussed in a separate thread, a potential solution that will allow more aggressive caps would be incorporating distinct supply caps for E-Mode categories.

relate here? The case you highlight here is outside of eMode as i understand your point.

I don’t have an opinion on the cap, just trying to understand the reasoning, so how would eMode specific caps help in that case?

11

Hi @sakulstra, apologies if the original comment was not clear.

We first want to clarify we do NOT consider the 65% LT outside of E-Mode as risky in regard to MATIC price volatility.

The reason for highlighting the usage of stMATIC compared to that of MaticX regards the discussion on setting more aggressive caps for LSDs, which are primarily used for borrowing the underlying asset .

In this scenario, as the oracles of the LSD (MaticX and stMATIC) follow the price of the underlying asset (MATIC), there is no risk of liquidation when borrowing the underlying asset against the LSD, leaving counterparty risk as the primary one. The community has voted to allow more aggressive caps in these cases here.

Following the vote, the proposal above recommends increasing the supply cap of stMATIC to 75% of its total circulating supply. However, as stMATIC is NOT used primarily as collateral to borrow MATIC, leads us to recommend not increasing the cap to more than 50% of the total circulating supply to mitigate concentration and liquidity risks, similar to our recommendations with other assets.

If we were able to set a separate cap for E-Mode, and given the community preference as voted on, we could recommend an additional increase for E-Mode use only, where the main risk would be counterparty risk.