Risk Parameter Recommendations
Summary
Should the community choose to list GMX, below are consolidated risk parameter recommendations. Please see further below for a breakdown of recommendations and considerations for transparency.
To summarize, the below consolidations were made:
- Gauntlet’s LTV and LT recs (lower values)
- Chaos’s cap recs (lower values)
- Gauntlet’s Interest Rate Curve recs
| Risk Parameters | Values |
|---|---|
| Supply Cap | 110k |
| Borrow Cap | 60k |
| Borrowable | Y |
| Isolation Mode | Y |
| Debt Ceiling | $2.5M |
| Collateral Enable | Y |
| LT | 55% |
| LTV | 45% |
| LB | 10800 (8%) |
| RF | 20% |
| LPF | 10% |
| Silo Borrowing | N |
| eMode | N |
Interest Rate Curves
| IR Parameters | Values |
|---|---|
| Base | 0% |
| Slope 1 | 9% |
| Slope 2 | 300% |
| Stable | 13% |
| Uopt | 45% |
Additional Detail
Gauntlet Recommendation and Analysis
GMX is the utility, governance, and fee accrual token for the GMX protocol and has a unique value accrual system. GMX is a highly staked asset, with approximately 78% of circulating GMX staked. With the current APR of 7% for GMX, there might be concerns about the use of GMX within the Aave liquidity pool.
Gauntlet Specification
Cap Recommendations
We provide cap recommendations utilizing our Supply and Borrow Cap Methdology.
Supply cap - 180k
Borrow cap - 180k
GMX total circulating on-chain supply is at 9.1M with $67M 30-Day ADV. GMX’s 25% market depth on Arbitrum DEXes is approximately 180k.
Isolation Mode
Isolation Mode - Yes
@Gauntlet recommends initially listing GMX in isolation mode to restrict protocol exposure to price swings and potential resulting insolvencies. GMX’s high volatility and relative initial listing to Aave markets support a conservative strategy to list the asset within Isolation. For further details, please see here for Gauntlet’s Isolation Mode Methodology.
Debt Ceiling - $7.5mm.
Initializing the debt ceiling with 50% of the dollar value of the supply cap will help protect against tail events while providing sufficient room to explore GMX usage.
Liquidation Threshold and Loan to Value
LT - 55%.
LTV - 45%
Gauntlet’s methodology for LTV/LT parameter settings relies entirely on real data manipulated in our simulations to determine risk/reward deltas and thus cannot be used to mitigate risk for an asset upon its initial listing in the way it is used for subsequent parameter recommendations. Instead, borrow and supply caps should be the primary parameters used to mitigate risk upon initial asset listing because these can be calculated without relying upon existing data.
LTV/LT should be set by replicating these values for the most similar/correlated asset on the same (or nearest similar) protocol Gauntlet recommends a 55% LT for GMX to account for this higher volatility (215% annualized volatility) and other risk-based metrics while giving room to explore the usage of GMX collateral.
Liquidation Bonus
LB - 10800 (8%)
Gauntlet recommends initializing with an LB of 8% to give liquidators incentive to liquidate GMX collateral.
Reserve Factor
RF - 20%
Based on risk-based metrics for similar assets, we recommend having a conservative reserve factor of 20%.
Liquidation Protocol Fee
LPF - 10%
The LPF is a percentage of the LB that ultimately contributes to a protocol’s reserves. LPFs, like LBs, are intimately linked to liquidation behavior, as they serve as the primary incentive for liquidators, and thus more data is needed to conduct analysis on what optimal LPFs should be after an initial recommendation is made upon asset listing.
LPF too high (and unadjusted LB) may deter liquidators from conducting liquidations due to fears of unprofitability. Likewise, a higher LPF, with an upwards adjusted LB to ensure liquidators are incentivized, may cause too much of the collateral to be eaten up by liquidations, which also impacts liquidator behavior.
Gauntlet recommends that non-stablecoins have 10% LPF to allow for protocol revenue from LPF while minimizing effects on liquidator behavior and user experience.
Gauntlet IR Curve Recommendations
Gauntlet has published its interest rate curve methodology here. Among other factors, there are two primary goals for interest rate curves:
- mitigate the risk of 100% utilization in a pool
- build reserves via protocol revenue to cover insolvencies or other expenses in the future
| IR Parameters | Assumptions |
|---|---|
| Base | 0% |
| Slope 1 | 9% |
| Slope 2 | 300% |
| Stable | 13% |
| Uopt | 45% |
Final Gauntlet Risk Parameter Summary
| Risk Parameters | Values |
|---|---|
| Supply Cap | 180k |
| Borrow Cap | 180k |
| Borrowable | Y |
| Isolation Mode | Y |
| Debt Ceiling | $7.5M |
| Collateral Enable | Y |
| LT | 55% |
| LTV | 53% |
| LB | 10800 (8%) |
| RF | 20% |
| LPF | 10% |
| Silo Borrowing | N |
| eMode | N |
Chaos Recommendation and Analysis
@ChaosLabs supports listing GMX in Isolation Mode as part of an overarching strategy to increase the offering of AAVE protocol with more volatile assets. As a low market cap asset, GMX is susceptible to price manipulation, so listing it with an appropriate debt ceiling is crucial to prevent a profitable pump attack.
Liquidity and Market Cap
When analyzing market cap and trading volumes of assets for listing, we are looking at the past 180 days, especially in light of the recent market turbulence. The average market cap of GMX over the past 180 days was $441M, and the average daily trading volume was $33M (CeFi & DeFi). We find the market cap adequate and reasonable trading volumes as long as they are considered when setting appropriate supply caps, a debt ceiling, and borrow caps.
Liquidation Threshold
Analyzing GMX price volatility over the past, we observed daily annualized volatility of 98% and 30-day annualized volatility of 79%. Considering this volatility we support the suggested LT of 62%.
We support listing GMX as borrowable under reasonable caps, as we do not observe a significant risk to the protocol by allowing to borrow GMX, as long as it is bound by a well-defined cap.
Debt Ceiling
Following Chaos Labs’ Isolation Mode Methodology, we recommend an initial debt ceiling of $2.5M. Under the methodology for Isolation Mode, we consider two levels of probabilities for extreme price drops - Medium-High and High. We estimate the probability of an extreme price drop for GMX as High. Given this debt ceiling, we do not identify a profitable attack vector under the current liquidity levels.
Supply Cap, Borrow Cap, and Liquidation Bonus
Following Chaos Labs’ approach to initial supply caps, as introduced with the Metis deployment recommendations, we propose setting the Supply Cap at 2x the liquidity available under the Liquidation Penalty price impact.
Given the concentrated liquidity of GMX, we recommend an 8% Liquidation Bonus and a derived supply cap of 110K GMX, and a borrow cap of 60K GMX.
Chaos Recommendations
We support the recommendations in the post for the Reserve Factor, Liquidation Protocol Fee, and Interest Rate curves.
Following the above analysis, we recommend listing GMX with the following parameter settings:
| Isolation Mode | Enable Borrow | Enable Collateral | LTV | LT | Liquidation Bonus | Reserve Factor | LPF | Supply Cap | Borrow Cap | Debt Ceiling |
|---|---|---|---|---|---|---|---|---|---|---|
| Yes | Yes | Yes | 52% | 62% | 8% | 20% | 0.1 | 110K | 60K | $2.5M |