[Proposal] Market Deprecation: Interest Rate (IR) Curve Changes, Forced Liquidation and Forced Return

Proposals
1

Background:

It has been a while since Venus started to deprecate TRXOLD and SXP markets. We noticed that the changes made to the markets in order to deprecate the markets are more effective to reduce supply but not very effective in reducing borrows. We came up with three approaches to reduce the borrow in markets to be deprecated, namely IR Curve Change, Forced Liquidation and Forced Return. Our team did a deep dive into the two markets: TRXOLD and SXP, to assess the applicability of these approaches.

Details on the 3 approaches:

  1. IR Curve Change so that a higher borrow APY will be charged. It is to incentivise the borrowers to return their debt, or else their debt will grow much faster and their position will be liquidated eventually and much sooner due to higher APY.

  2. Forced Liquidation After a grace period in which borrowers can return their debt in the market to be deprecated, the protocol can enable forced liquidation for the given market. Once forced liquidation is open for a given market, liquidators can repay the corresponding token and seize collateral plus the liquidation incentive. It is similar to normal liquidation except the following points:

    • Exemption from health factor check (i.e. check liquidation eligibility) if the debt to be repaid is in the market to be deprecated. [must check the health factor otherwise to avoid abuse]
    • Exemption from closeFactor (imposed so that liquidator can only liquidate up to 50% of the debt). This makes the liquidation faster.

  3. Forced Return. When a market is to be deprecated, if a user has position in the market on both sides. The protocol can execute Forced Return in which its supply will be used to repay the debt in the same market. After Forced Return, the user will end up with either a borrow position or supply position in that market, but not both positions. This approach should be initiated at the very beginning of market deprecation.

Conclusions:

  1. IR Curve Change does not work all the time. IR Curve change (increasing borrow APY) works to incentivise borrowers to return their debt. Without account owners reacting to the change, for it to work, the debt needs to grow and liquidation eventually happens. There are uncertainties though. The execution of this plan depends on the protocol exposure, borrows’ health factor and DEX liquidity. In some cases, it takes a very long time for the accounts to become eligible for liquidation. And when liquidation happens, liquidators may choose another asset to be repaid instead of the ones to be deprecated.

  2. A hybrid of the three approaches will be more effective to deprecate the market. Forced Return can be initiated at the very beginning of the market deprecation. There will be a grace period before the IR Curve Change kicks in. Forced Liquidation can be enabled after IR Curve Change is in place or at the same time.

Our Proposal

We propose the protocol to introduce two new features: Forced Return and Forced Liquidation. These two feature are effective when protocol decides to deprecate a market. Details can be found in the next section.

We would like to hear from the community. Any question, idea, feedback and discussion is welcomed and appreciated. Thank you.

Analysis Done on TRXOLD and SXP

  1. Market Level Supply, Borrow and Number of Borrowers:

    Market Supplies (qty) Borrows (qty) # of borrowers # of borrowers after removing known cases*
    TRXOLD 1.30M 938.83K 98 37
    SXP 12.17M 163.12K 1297 85

    *Known cases are the cases we think in which increased borrow APY will not work. The following are the known cases:

    • The total collateral is lower than $10: there is no incentive for liquidators to liquidate these accounts

    • The health factor exceeds 50: it will take too long for these accounts to hit liquidation as a result of increased borrow APY. Refer to the table below, for a APY of 400%, the borrow grows to 55 times in one year.

    • The health factor is not very high however the borrow in the market to be deprecated is taking up very low percentage of the debt (for example, for an account:

      • collateral_in_usd_times_collateral factor=120
      • borrow_in_usd=100
      • borrow_in_deprecated_market_in_usd=0.001.

      If we hold collateral_in_usd_times_collateral factor and borrow_in_usd in other markets as constant. 0.001 need to grow to 20.001 in order for the health factor to fall to 1.

      APY block per year rate per block grow factor after one year grow factor after 30 days
      150% 10368000 0.0000001929012346 4.48 1.13
      200% 10368000 0.0000001929012346 7.39 1.18
      400% 10368000 0.0000003858024691 54.6 1.40

  2. Estimated Debt Size At Liquidation After 30 days: we looked at those accounts which will be eligible for liquidation after debt in the given market grows to (<1.1) times as of now.

    Market Estimated Total Debt Size At Liquidation (qty) Current Debt of these accounts # of accounts
    TRXOLD 1.58M 909K 15
    SXP 7K 4K 64

  3. PancakeSwap Liquidity (qty)
    From the PancakeSwap liquidity in the table below, there is no liquidity issue for the estimated liquidation to be executed.

    2023-05-04 2023-05-05 2023-05-06 2023-05-07 2023-05-08 2023-05-09 2023-05-10
    TRXOLD 18.55M 18.78M 19.01M 19.16M 18.78M 18.52M 18.53M
    SXP 376.73K 375.49K 388.87K 392.45K 403.90K 406.47K 408.57K

The estimated liquidation and PancakeSwap liquidity indicates that a borrow APY at 150% (i.e. the APY which gives us grow factor of 1.13 in 30 days) works for TRXOLD as it leads to decent amount of liquidation of TRXOLD borrow positions, but not for SXP market. However there is limitation in the analysis due to the assumptions made in the estimates: we assumed no change in asset price, no change in other supply or borrow beside the borrow in the given market. Another assumption is that liquidator will liquidate TRXOLD or SXP when the health factor of the account falls below 1.

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