Summary
A proposal to:
- Increase AVAX’s supply cap on the Avalanche instance.
All cap increases are backed by Chaos Labs’ risk simulations, which consider user behavior, on-chain liquidity, and price impact, ensuring that higher caps do not introduce additional risk to the platform.
AVAX (Avalanche)
AVAX has reached 100% supply cap utilization while its borrow cap utilization is currently 69%.
Supply Distribution
The supply of AVAX is heavily concentrated within the top two positions, currently accounting for 60% of the total distribution. The two positions borrow uncorrelated assets such as WETH and BTC against AVAX collateral, and their size is significant compared to the on-chain and off-chain liquidity available. While the health score of the two positions is high and they are actively managed, reducing liquidation risk, their size carries a noticeable liquidation risk. Hence, we aim to limit the users from increasing their debt against AVAX collateral.
However, given that the supply cap of AVAX has been reached, boosted Balancer liquidity pools, which deposit their underlying assets into Aave, are not able to perform as intended. Such liquidity pools currently represent a limited size within Aave, as the wrapper contract is currently holding 87K AVAX. The Balancer wrapped contract can be found here.
As is visible by the top suppliers, WETH.e currently represents the majority of the borrowed assets against AVAX collateral, currently making up 67% of the total, followed by stablecoins such as USDC, USDT, and AUSD representing 22% of the total.
Liquidity
AVAX on-chain liquidity remains stable; however, it is largely insufficient to support the liquidation of the market’s biggest position.
Recommendation
In order to allow Balancer usage and enable liquidity growth, which in turn can help with ensuring the safety of the biggest position in the AVAX market, we support a marginal supply cap increase of 500,000 AVAX.
Specification
| Instance | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Avalanche | AVAX | 14,500,000 | 15,000,000 | - | - |
Next Steps
We will move forward and implement these updates via the Risk Steward process.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.
Copyright
Copyright and related rights waived via CC0