Summary
This proposal recommends increasing the collateral factors from 80% to 85% for four blue-chip markets on FiRM: WETH, WBTC, cbBTC, and wstETH. These markets have demonstrated robust liquidation performance during periods of extreme market volatility and high gas costs, supporting this risk parameter optimization.
Motivation
FiRM’s blue-chip collateral markets have matured significantly since their inception, accumulating substantial liquidation data that validates their resilience. Past market turbulence, namely the August 4-5, 2024 volatility event and subsequent market corrections, has provided stress-test conditions that demonstrate these markets can safely support higher collateral factors while maintaining protocol security.
FiRM’s isolated lending market design eliminates cross-collateral contagion risks and ensures predictable liquidation dynamics, as liquidators always repay DOLA debt rather than managing volatile asset-to-asset liquidations.
Increasing collateral factors for these proven assets serves multiple objectives. It improves capital efficiency for borrowers, enhances FiRM’s competitiveness relative to other lending protocols, and better aligns risk parameters with demonstrated market performance. The strong liquidation track record during high-gas environments confirms that liquidators remain incentivized to maintain market health even with tighter margins.
Background & Rationale
Competitive Landscape
| Protocol | Market Type | wBTC | cbBTC | wETH | wstETH | Risk Profile |
|---|---|---|---|---|---|---|
| Morpho | Isolated | 86% | 86% | 86% | 86% | Lower risk: isolated collateral, USDC borrowing |
| Euler | Isolated | 86% | 86% | 85% | 86% | Lower risk: isolated collateral, USDC borrowing |
| FiRM (Proposed) | Isolated | 85% | 85% | 85% | 85% | Lower risk: isolated collateral, DOLA-only borrowing |
| Compound | Cross-collateral | 80% | 80% | 83% | 80% | Higher risk: multi-asset collateral & borrowing |
| Aave | Cross-collateral | 78% | 78% | 83% | 81% | Higher risk: multi-asset collateral & borrowing |
The isolated market structure, where blue-chip assets are borrowed against stablecoin debt exclusively, provides superior liquidation reliability compared to cross-collateral protocols. This allows for tighter risk parameters without significantly compromising on safety.
Liquidation Performance Analysis
The FiRM liquidation data reveals suitable performance for these blue-chip markets during critical stress periods. The market volatility events of August 4-5, 2024 saw 12 successful near-instant liquidations (wETH: 6, wstETH: 4, wBTC: 2) occurring during conditions of:
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Gas prices spiking above 150 gwei
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ETH price dropping over 20% in 24 hours
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Multiple cascading liquidations across DeFi protocols
Using the Collateral Parameterization Model with updated price impact data:
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All four markets maintain healthy liquidation dynamics at 85% CF
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No cascade risk identified even assuming single-borrower concentration
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Liquidation profitability preserved at high gas price assumptions (100-300 gwei)
On-Chain Actions
For each market listed:
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WETH: setCollateralFactor = 8500 (85%)
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WBTC: setCollateralFactor = 8500 (85%)
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cbBTC: setCollateralFactor = 8500 (85%)
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wstETH: setCollateralFactor = 8500 (85%)
These changes will take effect immediately upon execution, allowing existing and new borrowers to access improved capital efficiency.