Chaos Labs - Supply and Borrow Cap Recommendations for FLOKI

Venus Governance Venus - Governance Proposals
1

Overview

A proposal to increase the supply cap for FLOKI as it has reached 100%

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.

Analysis:

FLOKI

Given the calculation below, our methodology allows for increasing the supply cap of FLOKI to 44,000,000,000, doubling the current supply.

Current Supply Cap Extreme Liquidation Amount (Floki) Max Amount Liquidated (Floki) R Recommended Supply Cap
FLOKI 22,000,000,000 4,300,000,000 10,400,000,000 2 44,000,000,000

Recommendation

Current Supply Cap Recommended Supply Cap Current Borrow Cap Recommended Borrow Cap
FLOKI 22,000,000,000 44,000,000,000 11,000,000,000 No Change