Chaos Labs - Risk Parameter Updates - 11/21/2023

Venus Governance Venus - Governance Proposals
1

Summary

  1. UNI (Core Pool)
    • Increase supply cap from 50,000 to 100,000
    • Increase borrow cap from 30,000 to 50,000

Analysis

UNI

The supply cap of UNI has reached 100% - 50K UNI.

Interim Methodology

Supply Cap

Definitions:

  1. CurrentSupplyCap - the current supply cap configured for the asset
  2. ExtremeLiquidationAmount - the amount eligible for liquidation given an extreme drop in the asset price using Chaos Labs’ Risk Explorer. We define the “extreme drop” for different market cap classes as follows:
    1. Small Cap (<$2B) - 50% drop
    2. Medium Cap ($2B-$20B) - 35% drop
    3. Large Cap (>$20B) and Stables- 15% drop
  3. MaxAmountLiquidated - the maximum amount that can be liquidated while keeping the slippage below the Liquidation Penalty

Framework:

  1. Evaluate the ExtremeProfitableLiquidationRatio:

This ratio represents how many times the ExtremeLiquidationAmount can be profitably liquidated had it all been liquidated at once. Requiring 90% of an asset’s liquidated amount will be liquidated at once is a defensive approach and can be set differently given changing risk appetites.

  1. Set R = min(ExtremeProfitableLiquidationRatio, 2)
  2. RecommendedSupplyCap = CurrentSupplyCap * R

Notes:

  1. The above assumes that additional supply and borrow amounts will be distributed similarly to the current supply and borrowing activity.
  2. To accommodate for unexpected borrower and market behavior, we provide an upper bound of 2*CurrentSupplyCap on the increase in supply caps.
  3. To prevent over-concentration of a token’s on-chain liquidity on Venus, we cap the supply of each token at 50% of its total circulating supply on a given network.
  4. We recommend waiting at least two weeks between consecutive recommendations for a single asset to analyze suppliers’ and borrowers’ behavior.
  5. For simplicity, we will round the recommended numbers to the nearest round number.

Please note that while setting supply and borrow caps, we also take into account additional factors. These include the total on-chain supply of the asset, redemption process (where applicable), oracle setup, and the potential for price manipulation and long/short attacks, all of which could influence our recommendations.

Given the calculation below, our methodology allows for increasing the supply cap of UNI to 100,000.

Current Supply Cap Extreme Liquidation Amount (UNI) Max Amount Liquidated (UNI) R Recommended Supply Cap
UNI 50,000 13,750 25,000 2 100,000

Borrow Cap

Although the borrow cap is currently only 50% utilized, given market conditions and the increase in the supply we recommend increasing it to 50,000 UNI.

Recommendation

Current Supply Cap Recommended Supply Cap Current Borrow Cap Recommended Borrow Cap
UNI 50,000 100,000 30,000 50,000