Recommendations From Gauntlet
Summary
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DAI: Gauntlet recommends raising the borrow cap of DAI to 7.5m from 7.0m.
- The borrows of DAI have reached the borrow cap, and our models indicate that the liquidity of DAI warrants an increase in DAI’s borrow cap on Venus. We take the risks of price manipulation and the positions of top wallets holding DAI into account when calculating borrow cap recommendations (to allow enough liquidity of DAI on Binance for market makers and users to buoy the market).
- Price manipulation risk for DAI on Venus is low. The top 3 wallets on Binance chain hold 8.6m DAI, and the top 5 wallets hold 10.8m DAI.
- We calculate this increase in borrow cap will contribute about $2,055 of additional potential reserve fee revenue annually to Venus.
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SXP: Gauntlet recommends lowering SXP’s collateral factor to 17.5%.
- Following this change going on-chain, Gauntlet will monitor the market to observe if the largest two suppliers of SXP adjust their borrow positions before further lowering SXP’s collateral factor. See the section below for more detail.
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TRXOLD: Please see Gauntlet’s recommendation options (more details in the SXP section)
- Conservative: Decrease CF to 0.20
- Aggressive: Decrease CF to 0.0 immediately
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TRX: Please see Gauntlet’s recommendation options (more details in the TRX section)
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Conservative:
- Increase CF to 0.425
- Increase Borrow Cap to 5,000,000
- Increase Supply Cap to 6,000,000
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Aggressive:
- Increase CF to 0.45
- Increase Borrow Cap to 8,000,000
- Increase Supply Cap to 10,000,000
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Conservative:
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BUSD: No further update beyond our last recommendation.
General Update
Below we provide a broader update on Venus protocol’s risk metrics.
1. Methodology
Gauntlet’s parameter updates seek to maintain the overall risk tolerance of the protocol while making risk trade-offs between specific assets.
Gauntlet’s parameter recommendations are driven by an optimization function that balances 3 core metrics: insolvencies, liquidations, and borrow usage. Parameter recommendations seek to optimize for this objective function. Our agent-based simulations use a wide array of varied input data that changes daily (including but not limited to asset volatility, asset correlation, asset collateral usage, DEX / CEX liquidity, trading volume, the expected market impact of trades, and liquidator behavior). Gauntlet’s simulations tease out complex relationships between these inputs that cannot be expressed as heuristics. As such, the input metrics we show below can help explain why some of the param recs have been made but should not be taken as the only reason for the recommendation. The individual collateral pages on the Venus Risk Dashboard cover other vital statistics and outputs from our simulations that can help with understanding interesting inputs and results related to our simulations.
For more details, please see Gauntlet’s Parameter Recommendation Methodology and Gauntlet’s Model Methodology.
2. Risk Dashboard
The community should use Gauntlet’s Venus Risk Dashboard to understand better any updated parameter suggestions and general market risk in Venus. Value at Risk represents the 95th percentile insolvency value that occurs from simulations we run over a range of volatilities to approximate a tail event. Liquidations at Risk represents the 95th percentile liquidation volume that occurs from simulations we run over a range of volatilities to approximate a tail event. We would note that our methodology on borrow/supply caps is currently driven by risk modeling that is independent and additive to our risk simulations shown on the Dashboard.
3. Top Borrowers
The below figures show trends in key market statistics regarding borrows and utilization that we will continue to monitor:
Top 10 Borrowers’ Aggregate Positions & Borrow Usages
Top 10 Borrowers’ Entire Supply
Top 10 Borrowers’ Entire Borrows
4. Liquidations
As Gauntlet tracks the state of the market and protocol, the charts below show some of the behavior we have been monitoring to ensure minimal market risk.
- March 9-10: Accounts with collateral asset BTC were liquidated on March 9 ($463k supply liquidated) and March 10 ($269k supply liquidated), due to BTC’s price falling ~8.0% between March 9 and March 10. An account with $82k of collateral asset LTC was liquidated on March 10; LTC fell 20.1% between March 9 and March 10. On March 9, $433k of borrowed USDT was repaid due to a decline in supplied BTC’s price that day. On March 10, an account with $203k of borrowed USDC was repaid, also driven by a price decline in collateral asset BTC.
- March 11: As USDC fell to as low as $0.88, accounts supplying $607k of USDC were liquidated. LTC also fell 8.9% from March 10 to March 11, liquidating $79k of supplied LTC. On March 11, the ~$699k of repaid borrows in mostly USDT and BUSD were driven by the price declines in collateral assets.
- March 17-19: Liquidations of $967k, $155k, and $213k occurred on March 17, 18, and 19, respectively, for mostly BUSD collateral assets. This was driven by an increase in the price of BNB, which rose ~12.7% between March 16-19.
We will continue to monitor user and protocol positions and make recommendations as needed. The charts below show the liquidations and repaid borrows of accounts liquidated this month.
Liquidation Amounts
Repaid Borrows
SXP Update
Recommendation:
- Lower SXP’s collateral factor to 17.5%, then allow the largest two suppliers of SXP to adjust their borrow positions before further lowering SXP’s collateral factor.
Deprecation Plan for SXP
We are providing an update on deprecating SXP from Venus protocol. See the chart below of the largest 30 suppliers of SXP and their respective borrow usages (prior to the recent increase in SXP’s price):
Risk Off Liquidations
The primary source of risk for Venus in deprecating SXP is the top two suppliers of SXP, who had borrow usages of 82% prior to the recent price increase. After SXP’s recent price increase (assuming it remains elevated), their borrow usage declined to about 59% (and their LTVs are now around 13%). We recommend lowering SXP’s collateral factor to 17.5% from 25%. This would help accelerate the deprecation of SXP from Venus while avoiding significant liquidations. We do not recommend lowering the collateral factor beyond 17.5% yet.
- Lowering SXP’s collateral factor to 15% provides a very thin buffer to prevent the users from being liquidated if SXP’s price declines. At a 17.5% collateral factor for SXP, the two SXP suppliers would not be liquidateable unless the price of SXP declined at least 26.5% from current levels. By contrast, a collateral factor of 15% means a price decline of 13.8% for SXP would liquidate the users.
- Lowering SXP’s collateral factor to 12.5% from 25% would liquidate the top two SXP suppliers and result in a total of $706k (1.5m tokens) of supplied SXP being liquidated. The ADV and 2% depth of SXP across CEX and DEX sources are $220m and $533k, respectively (before today’s price increase). But SXP’s liquidity on Binance chain is not as robust; transacting 1.5m tokens of SXP ($706k) on Binance would see slippage of 66%. Liquidators are unlikely to act on such accounts, so if these two accounts become liquidatable, their borrows could become bad debt for Venus.
- As we mentioned in a previous update, we have seen these accounts adjust their borrow positions over 7-8 days after collateral factor changes in SXP.
- Thus, we recommend lowering SXP’s CF to 17.5% and allowing users to adjust their positions before further lowering SXP’s collateral factor.
TRX UPDATE
Recommendations:
TRXOLD
- Conservative: Decrease CF to 0.20
- Aggressive: Decrease CF to 0.0 immediately
TRX
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Conservative:
- Increase CF to 0.425
- Increase Borrow Cap to 5,000,000
- Increase Supply Cap to 6,000,000
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Aggressive:
- Increase CF to 0.45
- Increase Borrow Cap to 8,000,000
- Increase Supply Cap to 10,000,000
Deprecation Plan for TRXOLD
Both the borrows and supplies of TRXOLD on Venus have decreased since our last analysis, and as such the deprecation of TRXOLD can be accelerated without adding outsized risk to Venus.
- Conservative: Decrease collateral factor to 0.20.
- Aggressive: Decrease collateral factor to 0 immediately.
See the chart below for updated forced liquidations resulting from lower collateral factors for TRXOLD.
As the 2% depth of TRXOLD on Binance chain is $65k, the market can easily absorb liquidations for all the accounts that supply TRXOLD on Venus. Lowering TRXOLD’s collateral factor to 0 would not introduce significant risk to Venus.
TRX Updated Parameters
Given the liquidity conditions of the new TRX token, we provide updated parameter recommendations:
Normally, we consider the following metrics when recommending parameters:
- Market cap of the token
- Total supply of the token
- Largest liquidity sources (exchanges including CEX and DEX)
- Volatility (30 day, 90 day, 1 year)
- Average daily trading volume on CEX and DEX
- Other DEX metrics
In this case, because there is no extensive data history for the new TRX token, we use on chain liquidity metrics to assess its risk. We note that TRX’s 2% depth across all CEX and DEX sources is $24m (~400m tokens), its circulating supply is comparable to TRXOLD (250+m tokens), and the top five wallets currently hold ~260m of the new TRX compared to 122m TRXOLD held by its top five wallets. As such, the liquidity of the new TRX on Binance chain appears to be comparable to TRXOLD. We also assess the risk of price manipulation with respect to collateral factor, borrow cap, and supply cap recommendations; that risk is very low for our conservative and aggressive recommendations.
Additional Notes
- BNB: No recommendations at this time.
- Given recent price action of BNB (down ~5-6% on March 27, 2023, but up ~3% since then), we bring attention to the BNB exploiter’s position. Given their current borrow usage is 72%, a price decline in BNB of 28% would trigger a liquidation
Next Steps:
- These recommendations will be put up for a VIP vote
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